Is Peckas Naturodlingar (NGM:PEKA B) 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.' 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. Importantly, Peckas Naturodlingar AB (publ) (NGM:PEKA B) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Peckas Naturodlingar

What Is Peckas Naturodlingar's Debt?

You can click the graphic below for the historical numbers, but it shows that Peckas Naturodlingar had kr16.4m of debt in September 2020, down from kr17.4m, one year before. However, because it has a cash reserve of kr1.05m, its net debt is less, at about kr15.4m.

A Look At Peckas Naturodlingar's Liabilities

According to the last reported balance sheet, Peckas Naturodlingar had liabilities of kr10.2m due within 12 months, and liabilities of kr14.2m due beyond 12 months. Offsetting these obligations, it had cash of kr1.05m as well as receivables valued at kr1.93m due within 12 months. So its liabilities total kr21.4m more than the combination of its cash and short-term receivables.

Peckas Naturodlingar has a market capitalization of kr56.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Peckas Naturodlingar 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 Peckas Naturodlingar wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to kr14m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Peckas Naturodlingar's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable kr18m 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. Another cause for caution is that is bled kr27m in negative free cash flow over the last twelve months. So in short it's a really 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. For instance, we've identified 6 warning signs for Peckas Naturodlingar (4 make us uncomfortable) 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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