Is Alelion Energy Systems (STO:ALELIO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Alelion Energy Systems AB (publ) (STO:ALELIO) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Alelion Energy Systems

What Is Alelion Energy Systems's Debt?

As you can see below, Alelion Energy Systems had kr35.3m of debt at March 2021, down from kr37.1m a year prior. However, because it has a cash reserve of kr2.24m, its net debt is less, at about kr33.1m.

How Healthy Is Alelion Energy Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alelion Energy Systems had liabilities of kr16.1m due within 12 months and liabilities of kr38.2m due beyond that. Offsetting these obligations, it had cash of kr2.24m as well as receivables valued at kr10.3m due within 12 months. So it has liabilities totalling kr41.7m more than its cash and near-term receivables, combined.

Since publicly traded Alelion Energy Systems shares are worth a total of kr307.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Over 12 months, Alelion Energy Systems made a loss at the EBIT level, and saw its revenue drop to kr32m, which is a fall of 61%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Alelion Energy Systems's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr76m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr60m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Alelion Energy Systems (3 are significant) 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.
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