Is Techstep (OB:TECH) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Techstep ASA (OB:TECH) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Techstep

How Much Debt Does Techstep Carry?

You can click the graphic below for the historical numbers, but it shows that Techstep had kr186.7m of debt in March 2023, down from kr228.1m, one year before. However, because it has a cash reserve of kr34.2m, its net debt is less, at about kr152.5m.

How Healthy Is Techstep's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Techstep had liabilities of kr516.0m due within 12 months and liabilities of kr134.1m due beyond that. Offsetting these obligations, it had cash of kr34.2m as well as receivables valued at kr175.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr440.3m.

This is a mountain of leverage relative to its market capitalization of kr527.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Techstep's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Techstep made a loss at the EBIT level, and saw its revenue drop to kr1.3b, which is a fall of 5.7%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Techstep produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr68m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr40m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Techstep is showing 5 warning signs in our investment analysis , and 3 of those are significant...

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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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.