Is PowerCell Sweden (STO:PCELL) Using Too Much 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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for PowerCell Sweden

How Much Debt Does PowerCell Sweden Carry?

As you can see below, PowerCell Sweden had kr30.6m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds kr134.5m in cash, so it actually has kr103.9m net cash.

How Strong Is PowerCell Sweden's Balance Sheet?

The latest balance sheet data shows that PowerCell Sweden had liabilities of kr131.3m due within a year, and liabilities of kr53.3m falling due after that. On the other hand, it had cash of kr134.5m and kr145.4m worth of receivables due within a year. So it actually has kr95.4m 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 you can't view debt in total isolation; since PowerCell Sweden will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year PowerCell Sweden wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to kr285m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is PowerCell Sweden?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months PowerCell Sweden lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr106m and booked a kr49m accounting loss. However, it has net cash of kr103.9m, so it has a bit of time before it will need more capital. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - PowerCell Sweden has 1 warning sign we think you should be aware of.

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.