Does ChromoGenics (STO:CHRO) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that ChromoGenics AB (STO:CHRO) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ChromoGenics

What Is ChromoGenics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ChromoGenics had kr57.9m of debt, an increase on kr49.7m, over one year. However, it also had kr21.3m in cash, and so its net debt is kr36.6m.

A Look At ChromoGenics' Liabilities

The latest balance sheet data shows that ChromoGenics had liabilities of kr27.4m due within a year, and liabilities of kr61.0m falling due after that. Offsetting these obligations, it had cash of kr21.3m as well as receivables valued at kr12.3m due within 12 months. So it has liabilities totalling kr54.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ChromoGenics has a market capitalization of kr185.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ChromoGenics'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 ChromoGenics had a loss before interest and tax, and actually shrunk its revenue by 47%, to kr24m. To be frank that doesn't bode well.

Caveat Emptor

Not only did ChromoGenics'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 kr71m 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. Another cause for caution is that is bled kr90m 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. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for ChromoGenics (of which 3 don't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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