Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Absolent Group AB (publ) (STO:ABSO) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Absolent Group
What Is Absolent Group's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Absolent Group had debt of kr593.4m, up from kr307.2m in one year. On the flip side, it has kr448.0m in cash leading to net debt of about kr145.4m.
How Healthy Is Absolent Group's Balance Sheet?
We can see from the most recent balance sheet that Absolent Group had liabilities of kr129.6m falling due within a year, and liabilities of kr688.9m due beyond that. Offsetting these obligations, it had cash of kr448.0m as well as receivables valued at kr146.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr224.5m.
Given Absolent Group has a market capitalization of kr4.53b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Absolent Group 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.
Over 12 months, Absolent Group reported revenue of kr991m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Absolent Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr34m. 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. We would feel better if it turned its trailing twelve month loss of kr69m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Absolent Group has 2 warning signs we think you should be aware of.
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. 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.
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About OM:ABSO
Absolent Air Care Group
Designs, develops, sells, installs, and maintains air filtration units.
Flawless balance sheet with high growth potential.
