Is SECITS Holding (STO:SECI) Using Debt In A Risky Way?

Warren Buffett famously said, '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 SECITS Holding AB (publ) (STO:SECI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SECITS Holding

What Is SECITS Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 SECITS Holding had kr19.4m of debt, an increase on kr4.11m, over one year. However, it also had kr2.69m in cash, and so its net debt is kr16.7m.

A Look At SECITS Holding's Liabilities

We can see from the most recent balance sheet that SECITS Holding had liabilities of kr89.1m falling due within a year, and liabilities of kr10.9m due beyond that. On the other hand, it had cash of kr2.69m and kr28.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr69.1m.

When you consider that this deficiency exceeds the company's kr59.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SECITS Holding'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.

In the last year SECITS Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 257%, to kr101m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate SECITS Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping kr21m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr20m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. Case in point: We've spotted 5 warning signs for SECITS Holding you should be aware of, and 4 of them are potentially serious.

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.