Is PowerCell Sweden (STO:PCELL) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, PowerCell Sweden AB (publ) (STO:PCELL) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PowerCell Sweden

What Is PowerCell Sweden's Net Debt?

As you can see below, PowerCell Sweden had kr62.9m of debt at June 2021, down from kr67.9m a year prior. But it also has kr399.5m in cash to offset that, meaning it has kr336.6m net cash.

A Look At PowerCell Sweden's Liabilities

Zooming in on the latest balance sheet data, we can see that PowerCell Sweden had liabilities of kr77.6m due within 12 months and liabilities of kr62.9m due beyond that. Offsetting these obligations, it had cash of kr399.5m as well as receivables valued at kr35.6m due within 12 months. So it can boast kr294.6m 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, PowerCell Sweden reported revenue of kr113m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is PowerCell Sweden?

While PowerCell Sweden lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 24% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a 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. Be aware that PowerCell Sweden is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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