Would Cedergrenska (STO:CEDER) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Cedergrenska AB (publ) (STO:CEDER) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cedergrenska

What Is Cedergrenska's Debt?

The image below, which you can click on for greater detail, shows that Cedergrenska had debt of kr50.9m at the end of September 2023, a reduction from kr60.5m over a year. However, it does have kr33.8m in cash offsetting this, leading to net debt of about kr17.1m.

How Strong Is Cedergrenska's Balance Sheet?

The latest balance sheet data shows that Cedergrenska had liabilities of kr137.5m due within a year, and liabilities of kr32.9m falling due after that. Offsetting this, it had kr33.8m in cash and kr25.0m in receivables that were due within 12 months. So its liabilities total kr111.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of kr179.8m, so it does suggest shareholders should keep an eye on Cedergrenska's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cedergrenska will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cedergrenska wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to kr853m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Cedergrenska had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr384k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of kr10m into a profit. In the meantime, we consider the stock very 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. To that end, you should learn about the 3 warning signs we've spotted with Cedergrenska (including 1 which is a bit unpleasant) .

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.