Health Check: How Prudently Does PowerCell Sweden (STO:PCELL) Use Debt?

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, PowerCell Sweden AB (publ) (STO:PCELL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PowerCell Sweden

What Is PowerCell Sweden's Net Debt?

The chart below, which you can click on for greater detail, shows that PowerCell Sweden had kr30.0m in debt in December 2020; about the same as the year before. However, it does have kr416.8m in cash offsetting this, leading to net cash of kr386.8m.

How Strong Is PowerCell Sweden's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PowerCell Sweden had liabilities of kr41.5m due within 12 months and liabilities of kr65.6m due beyond that. Offsetting these obligations, it had cash of kr416.8m as well as receivables valued at kr28.9m due within 12 months. So it can boast kr338.6m more liquid assets than total liabilities.

This surplus suggests that PowerCell Sweden has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that PowerCell Sweden 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 PowerCell Sweden'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 PowerCell Sweden wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to kr104m. With any luck the company will be able to grow its way to profitability.

So How Risky Is PowerCell Sweden?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that PowerCell Sweden had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr14m of cash and made a loss of kr117m. With only kr386.8m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, PowerCell Sweden may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for PowerCell Sweden that you should be aware of before investing here.

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. 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.
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