Is Concejo (STO:CNCJO B) Using Too Much Debt?

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. As with many other companies Concejo AB (publ) (STO:CNCJO 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Concejo

What Is Concejo's Net Debt?

As you can see below, Concejo had kr82.1m of debt at March 2023, down from kr214.0m a year prior. But it also has kr290.2m in cash to offset that, meaning it has kr208.1m net cash.

How Strong Is Concejo's Balance Sheet?

We can see from the most recent balance sheet that Concejo had liabilities of kr162.2m falling due within a year, and liabilities of kr101.8m due beyond that. Offsetting these obligations, it had cash of kr290.2m as well as receivables valued at kr115.7m due within 12 months. So it actually has kr141.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Concejo's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Concejo 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 it is future earnings, more than anything, that will determine Concejo'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.

Over 12 months, Concejo reported revenue of kr418m, which is a gain of 52%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Concejo?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Concejo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr79m and booked a kr69m accounting loss. With only kr208.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Concejo's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 Concejo is showing 1 warning sign in our investment analysis , you should know about...

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. 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.