Is Hofseth BioCare (OB:HBC) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hofseth BioCare ASA (OB:HBC) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hofseth BioCare

What Is Hofseth BioCare's Net Debt?

As you can see below, Hofseth BioCare had kr19.0m of debt at December 2020, down from kr50.5m a year prior. However, its balance sheet shows it holds kr172.8m in cash, so it actually has kr153.9m net cash.

A Look At Hofseth BioCare's Liabilities

According to the last reported balance sheet, Hofseth BioCare had liabilities of kr106.9m due within 12 months, and liabilities of kr89.3m due beyond 12 months. Offsetting this, it had kr172.8m in cash and kr14.3m in receivables that were due within 12 months. So its liabilities total kr9.06m more than the combination of its cash and short-term receivables.

Having regard to Hofseth BioCare's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr3.12b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hofseth BioCare boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hofseth BioCare will need earnings to service that debt. 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.

In the last year Hofseth BioCare wasn't profitable at an EBIT level, but managed to grow its revenue by 2.1%, to kr69m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Hofseth BioCare?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Hofseth BioCare had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr116m of cash and made a loss of kr102m. Given it only has net cash of kr153.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hofseth BioCare has 1 warning sign we think you should be aware of.

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.

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