We Think AdderaCare (STO:ADDERA) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. We can see that AdderaCare AB (STO:ADDERA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for AdderaCare

How Much Debt Does AdderaCare Carry?

As you can see below, AdderaCare had kr30.2m of debt at September 2020, down from kr47.6m a year prior. On the flip side, it has kr12.1m in cash leading to net debt of about kr18.1m.

A Look At AdderaCare's Liabilities

The latest balance sheet data shows that AdderaCare had liabilities of kr60.1m due within a year, and liabilities of kr40.8m falling due after that. Offsetting this, it had kr12.1m in cash and kr28.5m in receivables that were due within 12 months. So it has liabilities totalling kr60.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because AdderaCare is worth kr149.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine AdderaCare's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, AdderaCare made a loss at the EBIT level, and saw its revenue drop to kr198m, which is a fall of 3.6%. We would much prefer see growth.

Caveat Emptor

Importantly, AdderaCare had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr4.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of kr14m and the profit of kr4.6m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AdderaCare is showing 5 warning signs in our investment analysis , and 2 of those are potentially serious...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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