Is StrongPoint (OB:STRO) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that StrongPoint ASA (OB:STRO) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for StrongPoint

What Is StrongPoint's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 StrongPoint had kr93.0m of debt, an increase on kr69.6m, over one year. However, it does have kr27.8m in cash offsetting this, leading to net debt of about kr65.3m.

How Healthy Is StrongPoint's Balance Sheet?

According to the last reported balance sheet, StrongPoint had liabilities of kr448.7m due within 12 months, and liabilities of kr100.2m due beyond 12 months. On the other hand, it had cash of kr27.8m and kr259.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr261.4m.

StrongPoint has a market capitalization of kr528.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine StrongPoint's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year StrongPoint had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to kr1.3b. We would much prefer see growth.

Caveat Emptor

Importantly, StrongPoint had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr60m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of kr51m into a profit. So in short it's a really risky stock. 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. For example - StrongPoint has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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@simplywallst.com