Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that SARSYS-ASFT AB (publ) (NGM:SARS) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is SARSYS-ASFT's Debt?
As you can see below, SARSYS-ASFT had kr14.2m of debt at December 2021, down from kr19.2m a year prior. And it doesn't have much cash, so its net debt is about the same.
How Healthy Is SARSYS-ASFT's Balance Sheet?
According to the last reported balance sheet, SARSYS-ASFT had liabilities of kr18.3m due within 12 months, and liabilities of kr10.3m due beyond 12 months. Offsetting these obligations, it had cash of kr235.0k as well as receivables valued at kr6.05m due within 12 months. So its liabilities total kr22.4m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of kr26.6m, so it does suggest shareholders should keep an eye on SARSYS-ASFT's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is SARSYS-ASFT'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.
In the last year SARSYS-ASFT had a loss before interest and tax, and actually shrunk its revenue by 49%, to kr35m. That makes us nervous, to say the least.
While SARSYS-ASFT's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr14m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr2.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that SARSYS-ASFT is showing 4 warning signs in our investment analysis , and 3 of those are a bit concerning...
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.