Does Oscar Properties Holding (STO:OP) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Oscar Properties Holding AB (publ) (STO:OP) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Oscar Properties Holding

What Is Oscar Properties Holding's Debt?

The image below, which you can click on for greater detail, shows that Oscar Properties Holding had debt of kr870.6m at the end of September 2020, a reduction from kr1.29b over a year. However, it also had kr32.9m in cash, and so its net debt is kr837.7m.

How Healthy Is Oscar Properties Holding's Balance Sheet?

We can see from the most recent balance sheet that Oscar Properties Holding had liabilities of kr1.35b falling due within a year, and liabilities of kr77.8m due beyond that. Offsetting this, it had kr32.9m in cash and kr599.0m in receivables that were due within 12 months. So its liabilities total kr792.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr361.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Oscar Properties Holding would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Oscar Properties 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.

Over 12 months, Oscar Properties Holding made a loss at the EBIT level, and saw its revenue drop to kr246m, which is a fall of 73%. To be frank that doesn't bode well.

Caveat Emptor

While Oscar Properties Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr136m. 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. For example, we would not want to see a repeat of last year's loss of kr83m. And until that time we think this is a risky stock. 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. Case in point: We've spotted 5 warning signs for Oscar Properties Holding you should be aware of, and 2 of them are significant.

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. 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.
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