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.' 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. As with many other companies Swedish Stirling AB (publ) (STO:STRLNG) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Swedish Stirling's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Swedish Stirling had kr72.7m of debt in September 2021, down from kr190.8m, one year before. However, it does have kr263.6m in cash offsetting this, leading to net cash of kr190.9m.
How Healthy Is Swedish Stirling's Balance Sheet?
We can see from the most recent balance sheet that Swedish Stirling had liabilities of kr11.0m falling due within a year, and liabilities of kr85.0m due beyond that. Offsetting these obligations, it had cash of kr263.6m as well as receivables valued at kr1.84m due within 12 months. So it actually has kr169.5m more liquid assets than total liabilities.
This surplus suggests that Swedish Stirling has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Swedish Stirling boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Swedish Stirling'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.
Over 12 months, Swedish Stirling reported revenue of kr61m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Swedish Stirling?
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 Swedish Stirling 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 kr112m and booked a kr68m accounting loss. With only kr190.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Swedish Stirling has 3 warning signs (and 1 which shouldn't be ignored) we think 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.