Alelion Energy Systems (STO:ALELIO) Is Carrying A Fair Bit Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Alelion Energy Systems AB (publ) (STO:ALELIO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alelion Energy Systems

What Is Alelion Energy Systems's Net Debt?

The chart below, which you can click on for greater detail, shows that Alelion Energy Systems had kr34.5m in debt in December 2021; about the same as the year before. However, because it has a cash reserve of kr29.1m, its net debt is less, at about kr5.41m.

How Strong Is Alelion Energy Systems' Balance Sheet?

The latest balance sheet data shows that Alelion Energy Systems had liabilities of kr17.9m due within a year, and liabilities of kr36.9m falling due after that. Offsetting these obligations, it had cash of kr29.1m as well as receivables valued at kr9.87m due within 12 months. So it has liabilities totalling kr15.9m more than its cash and near-term receivables, combined.

Since publicly traded Alelion Energy Systems shares are worth a total of kr307.6m, it seems unlikely that this level of liabilities would be a major 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 it is Alelion Energy Systems's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Alelion Energy Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 117%, to kr56m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Alelion Energy Systems's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable kr62m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr60m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Alelion Energy Systems (2 are a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.