Hofseth BioCare (OB:HBC) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hofseth BioCare ASA (OB:HBC) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hofseth BioCare

How Much Debt Does Hofseth BioCare Carry?

The image below, which you can click on for greater detail, shows that Hofseth BioCare had debt of kr128.5m at the end of June 2021, a reduction from kr144.1m over a year. However, because it has a cash reserve of kr112.6m, its net debt is less, at about kr15.9m.

A Look At Hofseth BioCare's Liabilities

Zooming in on the latest balance sheet data, we can see that Hofseth BioCare had liabilities of kr127.0m due within 12 months and liabilities of kr117.3m due beyond that. Offsetting this, it had kr112.6m in cash and kr17.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr113.9m.

Given Hofseth BioCare has a market capitalization of kr2.15b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Hofseth BioCare has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hofseth BioCare's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Hofseth BioCare saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Hofseth BioCare produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr106m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr99m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hofseth BioCare you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.