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

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.' 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 Climeon AB (publ) (STO:CLIME B) makes use of debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Climeon

How Much Debt Does Climeon Carry?

As you can see below, at the end of March 2021, Climeon had kr70.1m of debt, up from kr45.1m a year ago. Click the image for more detail. However, it does have kr232.6m in cash offsetting this, leading to net cash of kr162.5m.

How Healthy Is Climeon's Balance Sheet?

According to the last reported balance sheet, Climeon had liabilities of kr108.4m due within 12 months, and liabilities of kr99.2m due beyond 12 months. Offsetting this, it had kr232.6m in cash and kr97.8m in receivables that were due within 12 months. So it actually has kr122.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Climeon could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Climeon has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Climeon can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Climeon had a loss before interest and tax, and actually shrunk its revenue by 46%, to kr76m. To be frank that doesn't bode well.

So How Risky Is Climeon?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Climeon had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr167m of cash and made a loss of kr96m. Given it only has net cash of kr162.5m, 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 2 warning signs for Climeon that you should be aware of before investing here.

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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