Health Check: How Prudently Does Northbaze Group (STO:NBZ) Use 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. Importantly, Northbaze Group AB (publ) (STO:NBZ) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Northbaze Group

What Is Northbaze Group's Debt?

The image below, which you can click on for greater detail, shows that Northbaze Group had debt of kr32.6m at the end of December 2023, a reduction from kr37.3m over a year. However, it also had kr11.0m in cash, and so its net debt is kr21.5m.

How Healthy Is Northbaze Group's Balance Sheet?

The latest balance sheet data shows that Northbaze Group had liabilities of kr96.4m due within a year, and liabilities of kr9.32m falling due after that. Offsetting these obligations, it had cash of kr11.0m as well as receivables valued at kr26.0m due within 12 months. So it has liabilities totalling kr68.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr62.8m, we think shareholders really should watch Northbaze Group's debt levels, like a parent watching their child ride a bike for the first time. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Northbaze Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Northbaze Group had a loss before interest and tax, and actually shrunk its revenue by 30%, to kr118m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Northbaze Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr24m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of kr31m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Northbaze Group that 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.