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.' 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. As with many other companies Peckas Naturodlingar AB (publ) (NGM:PEKA B) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Peckas Naturodlingar's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Peckas Naturodlingar had debt of kr26.7m, up from kr16.8m in one year. However, it does have kr8.88m in cash offsetting this, leading to net debt of about kr17.8m.
How Healthy Is Peckas Naturodlingar's Balance Sheet?
The latest balance sheet data shows that Peckas Naturodlingar had liabilities of kr12.9m due within a year, and liabilities of kr23.7m falling due after that. Offsetting this, it had kr8.88m in cash and kr2.46m in receivables that were due within 12 months. So it has liabilities totalling kr25.3m more than its cash and near-term receivables, combined.
Peckas Naturodlingar has a market capitalization of kr109.8m, 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 it is Peckas Naturodlingar'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.
Over 12 months, Peckas Naturodlingar reported revenue of kr13m, which is a gain of 42%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Despite the top line growth, Peckas Naturodlingar still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr41m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 6 warning signs for Peckas Naturodlingar you should be aware of, and 3 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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