Premium Snacks Nordic (STO:SNX) Is Making Moderate Use Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Premium Snacks Nordic AB (publ) (STO:SNX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Premium Snacks Nordic

How Much Debt Does Premium Snacks Nordic Carry?

As you can see below, at the end of June 2023, Premium Snacks Nordic had kr47.9m of debt, up from kr44.9m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Premium Snacks Nordic's Balance Sheet?

According to the last reported balance sheet, Premium Snacks Nordic had liabilities of kr84.7m due within 12 months, and liabilities of kr15.3m due beyond 12 months. On the other hand, it had cash of kr513.0k and kr39.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr60.3m.

This deficit is considerable relative to its market capitalization of kr86.1m, so it does suggest shareholders should keep an eye on Premium Snacks Nordic's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Premium Snacks Nordic'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.

Over 12 months, Premium Snacks Nordic reported revenue of kr340m, which is a gain of 7.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Premium Snacks Nordic had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr1.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of kr4.2m. So we do think this stock is quite 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 3 warning signs for Premium Snacks Nordic you should be aware of, and 2 of them can't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.