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

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. As with many other companies PowerCell Sweden AB (publ) (STO:PCELL) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PowerCell Sweden

What Is PowerCell Sweden's Net Debt?

You can click the graphic below for the historical numbers, but it shows that PowerCell Sweden had kr25.2m of debt in March 2023, down from kr30.5m, one year before. But it also has kr207.2m in cash to offset that, meaning it has kr182.0m net cash.

A Look At PowerCell Sweden's Liabilities

According to the last reported balance sheet, PowerCell Sweden had liabilities of kr112.0m due within 12 months, and liabilities of kr55.7m due beyond 12 months. On the other hand, it had cash of kr207.2m and kr100.4m worth of receivables due within a year. So it actually has kr139.8m 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. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year PowerCell Sweden wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to kr265m. With any luck the company will be able to grow its way to profitability.

So How Risky Is PowerCell Sweden?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that PowerCell Sweden had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr83m and booked a kr58m accounting loss. Given it only has net cash of kr182.0m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, PowerCell Sweden may be on a path to profitability. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for PowerCell Sweden you should know about.

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.