Here's Why Cortus Energy (STO:CE) Can Afford Some 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 can see that Cortus Energy AB (publ) (STO:CE) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cortus Energy

How Much Debt Does Cortus Energy Carry?

As you can see below, at the end of December 2020, Cortus Energy had kr81.9m of debt, up from kr26.1m a year ago. Click the image for more detail. However, it also had kr32.8m in cash, and so its net debt is kr49.1m.

A Look At Cortus Energy's Liabilities

We can see from the most recent balance sheet that Cortus Energy had liabilities of kr30.0m falling due within a year, and liabilities of kr79.8m due beyond that. Offsetting these obligations, it had cash of kr32.8m as well as receivables valued at kr4.20m due within 12 months. So its liabilities total kr72.8m more than the combination of its cash and short-term receivables.

Since publicly traded Cortus Energy shares are worth a total of kr503.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cortus Energy's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Cortus Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 238%, to kr1.4m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Over the last twelve months Cortus Energy produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping kr63m. 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. However, it doesn't help that it burned through kr64m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Cortus Energy (of which 3 make us uncomfortable!) you should know about.

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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