Is Oscar Properties Holding (STO:OP) Using Too Much 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.' 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. We note that Oscar Properties Holding AB (publ) (STO:OP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See 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 at June 2021 Oscar Properties Holding had debt of kr3.07b, up from kr1.14b in one year. However, it also had kr122.9m in cash, and so its net debt is kr2.95b.

A Look At Oscar Properties Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Oscar Properties Holding had liabilities of kr1.10b due within 12 months and liabilities of kr2.67b due beyond that. On the other hand, it had cash of kr122.9m and kr361.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr3.28b.

The deficiency here weighs heavily on the kr1.29b 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Oscar Properties 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 Oscar Properties Holding had a loss before interest and tax, and actually shrunk its revenue by 44%, to kr110m. 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. To be specific the EBIT loss came in at kr86m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But on the bright side the company actually produced a statutory profit of kr75m and free cash flow of kr157m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 5 warning signs with Oscar Properties Holding (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.

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. 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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