These 4 Measures Indicate That AdderaCare (STO:ADDERA) Is Using Debt Reasonably Well

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. We can see that AdderaCare AB (STO:ADDERA) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AdderaCare

What Is AdderaCare's Debt?

You can click the graphic below for the historical numbers, but it shows that AdderaCare had kr29.1m of debt in March 2021, down from kr46.2m, one year before. But it also has kr35.6m in cash to offset that, meaning it has kr6.52m net cash.

How Healthy Is AdderaCare's Balance Sheet?

We can see from the most recent balance sheet that AdderaCare had liabilities of kr54.2m falling due within a year, and liabilities of kr36.3m due beyond that. On the other hand, it had cash of kr35.6m and kr20.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr34.9m.

Of course, AdderaCare has a market capitalization of kr227.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, AdderaCare boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, AdderaCare made a loss at the EBIT level, last year, but improved that to positive EBIT of kr2.2m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AdderaCare can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AdderaCare has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, AdderaCare actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While AdderaCare does have more liabilities than liquid assets, it also has net cash of kr6.52m. The cherry on top was that in converted 621% of that EBIT to free cash flow, bringing in kr14m. So we are not troubled with AdderaCare's debt use. 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 AdderaCare you should be aware of, and 1 of them is potentially serious.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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