Is OXE Marine (STO:OXE) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that OXE Marine AB (publ) (STO:OXE) does have debt on its balance sheet. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for OXE Marine

What Is OXE Marine's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 OXE Marine had debt of kr204.9m, up from kr155.7m in one year. However, it does have kr41.4m in cash offsetting this, leading to net debt of about kr163.5m.

How Healthy Is OXE Marine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OXE Marine had liabilities of kr62.9m due within 12 months and liabilities of kr201.3m due beyond that. Offsetting this, it had kr41.4m in cash and kr37.8m in receivables that were due within 12 months. So it has liabilities totalling kr184.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because OXE Marine is worth kr455.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 OXE Marine can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year OXE Marine had a loss before interest and tax, and actually shrunk its revenue by 17%, to kr76m. We would much prefer see growth.

Caveat Emptor

While OXE Marine's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr83m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of kr86m into a profit. So to be blunt we do think it is risky. 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 OXE Marine is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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