Does Swedish Stirling (STO:STRLNG) Have A Healthy Balance Sheet?

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.' 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. We can see that Swedish Stirling AB (publ) (STO:STRLNG) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Swedish Stirling

What Is Swedish Stirling's Net Debt?

As you can see below, at the end of December 2020, Swedish Stirling had kr204.6m of debt, up from kr115.3m a year ago. Click the image for more detail. However, it also had kr141.6m in cash, and so its net debt is kr62.9m.

How Healthy Is Swedish Stirling's Balance Sheet?

The latest balance sheet data shows that Swedish Stirling had liabilities of kr18.9m due within a year, and liabilities of kr201.3m falling due after that. Offsetting this, it had kr141.6m in cash and kr1.23m in receivables that were due within 12 months. So its liabilities total kr77.4m more than the combination of its cash and short-term receivables.

Since publicly traded Swedish Stirling shares are worth a total of kr2.22b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Swedish Stirling's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Swedish Stirling reported revenue of kr53m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Swedish Stirling had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr23m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr102m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For example Swedish Stirling has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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