Phase Holographic Imaging PHI (NGM:PHI) Is Carrying A Fair Bit Of 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Phase Holographic Imaging PHI AB (publ) (NGM:PHI) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Phase Holographic Imaging PHI

How Much Debt Does Phase Holographic Imaging PHI Carry?

As you can see below, Phase Holographic Imaging PHI had kr20.6m of debt at April 2023, down from kr25.2m a year prior. On the flip side, it has kr5.31m in cash leading to net debt of about kr15.3m.

How Healthy Is Phase Holographic Imaging PHI's Balance Sheet?

The latest balance sheet data shows that Phase Holographic Imaging PHI had liabilities of kr10.5m due within a year, and liabilities of kr20.6m falling due after that. Offsetting these obligations, it had cash of kr5.31m as well as receivables valued at kr5.42m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr20.4m.

Since publicly traded Phase Holographic Imaging PHI shares are worth a total of kr193.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Phase Holographic Imaging PHI'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, Phase Holographic Imaging PHI reported revenue of kr9.9m, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Phase Holographic Imaging PHI managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable kr20m at the EBIT level. 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 kr23m. 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. We've identified 5 warning signs with Phase Holographic Imaging PHI (at least 3 which are a bit concerning) , and understanding them should be part of your investment process.

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.