Would Premium Snacks Nordic (STO:SNX) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Premium Snacks Nordic AB (publ) (STO:SNX) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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 Premium Snacks Nordic

How Much Debt Does Premium Snacks Nordic Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Premium Snacks Nordic had debt of kr42.8m, up from kr36.2m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Premium Snacks Nordic's Balance Sheet?

The latest balance sheet data shows that Premium Snacks Nordic had liabilities of kr77.7m due within a year, and liabilities of kr11.2m falling due after that. On the other hand, it had cash of kr372.0k and kr35.4m worth of receivables due within a year. So it has liabilities totalling kr53.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr87.5m, 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 you can't view debt in total isolation; since Premium Snacks Nordic will need earnings to service that debt. 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 kr336m, which is a gain of 6.0%, 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

Over the last twelve months Premium Snacks Nordic produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr3.7m. 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. Another cause for caution is that is bled kr11m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Premium Snacks Nordic is showing 4 warning signs in our investment analysis , and 3 of those are significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.