Lyckegård Group (STO:LYGRD) 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.' 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, Lyckegård Group AB (publ) (STO:LYGRD) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lyckegård Group

How Much Debt Does Lyckegård Group Carry?

As you can see below, at the end of September 2023, Lyckegård Group had kr32.4m of debt, up from kr14.3m a year ago. Click the image for more detail. However, it also had kr5.49m in cash, and so its net debt is kr26.9m.

How Healthy Is Lyckegård Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lyckegård Group had liabilities of kr70.3m due within 12 months and liabilities of kr32.6m due beyond that. On the other hand, it had cash of kr5.49m and kr25.7m worth of receivables due within a year. So it has liabilities totalling kr71.7m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr79.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lyckegård Group'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 Lyckegård Group wasn't profitable at an EBIT level, but managed to grow its revenue by 222%, to kr156m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Lyckegård Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr14m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of kr20m into a profit. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Lyckegård Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.