Scope Fluidics (WSE:SCP) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Scope Fluidics S.A. (WSE:SCP) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Scope Fluidics

What Is Scope Fluidics's Debt?

As you can see below, at the end of March 2022, Scope Fluidics had zł18.6m of debt, up from none a year ago. Click the image for more detail. However, it also had zł12.9m in cash, and so its net debt is zł5.70m.

A Look At Scope Fluidics' Liabilities

According to the last reported balance sheet, Scope Fluidics had liabilities of zł11.7m due within 12 months, and liabilities of zł35.7m due beyond 12 months. On the other hand, it had cash of zł12.9m and zł1.13m worth of receivables due within a year. So its liabilities total zł33.4m more than the combination of its cash and short-term receivables.

Given Scope Fluidics has a market capitalization of zł263.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Scope Fluidics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, Scope Fluidics shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

Caveat Emptor

Over the last twelve months Scope Fluidics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at zł8.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł30m of cash over the last year. So in short it's a really risky stock. 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 Scope Fluidics is showing 5 warning signs in our investment analysis , and 3 of those are concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.