Climeon (STO:CLIME B) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Climeon AB (publ) (STO:CLIME B) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Climeon

What Is Climeon's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Climeon had debt of kr107.2m, up from kr10.4m in one year. But on the other hand it also has kr314.9m in cash, leading to a kr207.7m net cash position.

How Strong Is Climeon's Balance Sheet?

The latest balance sheet data shows that Climeon had liabilities of kr104.7m due within a year, and liabilities of kr107.2m falling due after that. Offsetting these obligations, it had cash of kr314.9m as well as receivables valued at kr69.4m due within 12 months. So it actually has kr172.5m more liquid assets than total liabilities.

This surplus suggests that Climeon has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Climeon 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 it is future earnings, more than anything, that will determine Climeon's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Climeon had a loss before interest and tax, and actually shrunk its revenue by 44%, to kr80m. That makes us nervous, to say the least.

So How Risky Is Climeon?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Climeon lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr147m and booked a kr140m accounting loss. Given it only has net cash of kr207.7m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Climeon 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. 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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