Is Climeon (STO:CLIME B) Weighed On By Its Debt Load?

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.' 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. Importantly, Climeon AB (publ) (STO:CLIME B) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

As you can see below, Climeon had kr29.4m of debt at September 2022, down from kr149.0m a year prior. But it also has kr187.7m in cash to offset that, meaning it has kr158.2m net cash.

How Healthy Is Climeon's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Climeon had liabilities of kr134.2m due within 12 months and liabilities of kr29.4m due beyond that. On the other hand, it had cash of kr187.7m and kr69.2m worth of receivables due within a year. So it can boast kr93.3m more liquid assets than total liabilities.

This surplus suggests that Climeon 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 Climeon has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Climeon'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 Climeon had a loss before interest and tax, and actually shrunk its revenue by 71%, to kr17m. To be frank that doesn't bode well.

So How Risky Is Climeon?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Climeon had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr113m and booked a kr123m accounting loss. With only kr158.2m 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. 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. For example Climeon has 5 warning signs (and 2 which are significant) we think 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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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.