Is Climeon (STO:CLIME B) Using Debt In A Risky Way?

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. Importantly, Climeon AB (publ) (STO:CLIME B) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Climeon

What Is Climeon's Debt?

The image below, which you can click on for greater detail, shows that Climeon had debt of kr30.7m at the end of June 2022, a reduction from kr150.3m over a year. But it also has kr221.6m in cash to offset that, meaning it has kr190.9m net cash.

A Look At Climeon's Liabilities

According to the last reported balance sheet, Climeon had liabilities of kr145.5m due within 12 months, and liabilities of kr30.7m due beyond 12 months. Offsetting this, it had kr221.6m in cash and kr69.3m in receivables that were due within 12 months. So it can boast kr114.6m more liquid assets than total liabilities.

It's good to see that Climeon has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Climeon boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 65%, to kr25m. 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. Indeed, in that time it burnt through kr123m of cash and made a loss of kr135m. With only kr190.9m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. Be aware that Climeon is showing 5 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.