Health Check: How Prudently Does SECITS Holding (STO:SECI) Use Debt?

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. As with many other companies SECITS Holding AB (publ) (STO:SECI) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SECITS Holding

How Much Debt Does SECITS Holding Carry?

As you can see below, at the end of June 2022, SECITS Holding had kr36.4m of debt, up from kr15.2m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is SECITS Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SECITS Holding had liabilities of kr67.9m due within 12 months and liabilities of kr24.7m due beyond that. On the other hand, it had cash of kr576.0k and kr27.1m worth of receivables due within a year. So it has liabilities totalling kr64.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr66.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SECITS Holding 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 SECITS Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 328%, to kr125m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, SECITS Holding still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr31m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 instance, we've identified 5 warning signs for SECITS Holding (4 don't sit too well with us) you should be aware of.

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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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.