Health Check: How Prudently Does Cell Impact (STO:CI) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Cell Impact AB (publ) (STO:CI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cell Impact

What Is Cell Impact's Net Debt?

As you can see below, at the end of December 2022, Cell Impact had kr32.1m of debt, up from kr4.64m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr164.7m in cash, so it actually has kr132.6m net cash.

How Healthy Is Cell Impact's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cell Impact had liabilities of kr43.8m due within 12 months and liabilities of kr33.3m due beyond that. Offsetting this, it had kr164.7m in cash and kr25.3m in receivables that were due within 12 months. So it can boast kr112.8m more liquid assets than total liabilities.

This surplus suggests that Cell Impact is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Cell Impact has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Cell Impact 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, Cell Impact reported revenue of kr92m, which is a gain of 12%, 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.

So How Risky Is Cell Impact?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Cell Impact lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr174m and booked a kr104m accounting loss. Given it only has net cash of kr132.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 4 warning signs for Cell Impact (2 shouldn't be ignored!) that you should be aware of before investing here.

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. 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.