Is Bactiguard Holding (STO:BACTI B) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Bactiguard Holding AB (publ) (STO:BACTI B) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bactiguard Holding

What Is Bactiguard Holding's Net Debt?

As you can see below, at the end of December 2020, Bactiguard Holding had kr188.0m of debt, up from kr126.9m a year ago. Click the image for more detail. However, it also had kr9.89m in cash, and so its net debt is kr178.1m.

A Look At Bactiguard Holding's Liabilities

The latest balance sheet data shows that Bactiguard Holding had liabilities of kr33.9m due within a year, and liabilities of kr266.7m falling due after that. Offsetting these obligations, it had cash of kr9.89m as well as receivables valued at kr65.3m due within 12 months. So its liabilities total kr225.4m more than the combination of its cash and short-term receivables.

Given Bactiguard Holding has a market capitalization of kr4.86b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Bactiguard Holding'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.

In the last year Bactiguard Holding had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to kr177m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Bactiguard Holding produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr18m. 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. However, it doesn't help that it burned through kr15m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Bactiguard Holding that you should be aware of before investing here.

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.

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This article by Simply Wall St is general in nature. 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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