Is PowerCell Sweden (STO:PCELL) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 PowerCell Sweden AB (publ) (STO:PCELL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PowerCell Sweden

How Much Debt Does PowerCell Sweden Carry?

You can click the graphic below for the historical numbers, but it shows that PowerCell Sweden had kr30.5m of debt in June 2022, down from kr62.9m, one year before. However, it does have kr256.7m in cash offsetting this, leading to net cash of kr226.1m.

How Strong Is PowerCell Sweden's Balance Sheet?

The latest balance sheet data shows that PowerCell Sweden had liabilities of kr99.5m due within a year, and liabilities of kr57.8m falling due after that. Offsetting this, it had kr256.7m in cash and kr96.3m in receivables that were due within 12 months. So it actually has kr195.6m more liquid assets than total liabilities.

This short term liquidity is a sign that PowerCell Sweden could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PowerCell Sweden has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if PowerCell Sweden 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.

Over 12 months, PowerCell Sweden reported revenue of kr189m, which is a gain of 68%, although it did not report any earnings before interest and tax. 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 in the last year PowerCell Sweden had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr151m and booked a kr75m accounting loss. With only kr226.1m on the balance sheet, it would appear that its going to need to raise capital again soon. PowerCell Sweden's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great 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.

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. 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.