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

Warren Buffett famously said, '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. As with many other companies Concejo AB (publ) (STO:CNCJO B) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Concejo

What Is Concejo's Net Debt?

The chart below, which you can click on for greater detail, shows that Concejo had kr75.5m in debt in June 2023; about the same as the year before. But on the other hand it also has kr240.1m in cash, leading to a kr164.6m net cash position.

A Look At Concejo's Liabilities

Zooming in on the latest balance sheet data, we can see that Concejo had liabilities of kr174.8m due within 12 months and liabilities of kr84.5m due beyond that. Offsetting this, it had kr240.1m in cash and kr137.1m in receivables that were due within 12 months. So it actually has kr117.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Concejo's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Concejo boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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.

In the last year Concejo wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to kr461m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Concejo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Concejo had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr87m and booked a kr26m accounting loss. With only kr164.6m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Concejo has 1 warning sign we think you should be aware of.

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.