Eolus Vind (STO:EOLU B) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Eolus Vind AB (publ) (STO:EOLU B) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eolus Vind

What Is Eolus Vind's Net Debt?

As you can see below, Eolus Vind had kr335.0m of debt at March 2022, down from kr454.6m a year prior. But it also has kr676.0m in cash to offset that, meaning it has kr341.0m net cash.

How Strong Is Eolus Vind's Balance Sheet?

The latest balance sheet data shows that Eolus Vind had liabilities of kr718.0m due within a year, and liabilities of kr92.0m falling due after that. Offsetting these obligations, it had cash of kr676.0m as well as receivables valued at kr129.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Eolus Vind's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr1.95b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Eolus Vind 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 ultimately the future profitability of the business will decide if Eolus Vind can strengthen its balance sheet over time. 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, Eolus Vind reported revenue of kr2.8b, which is a gain of 44%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Eolus Vind?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Eolus Vind lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr213m and booked a kr140m accounting loss. With only kr341.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Eolus Vind'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. We've identified 2 warning signs with Eolus Vind (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.