Is CellaVision (STO:CEVI) A Risky Investment?

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. As with many other companies CellaVision AB (publ) (STO:CEVI) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 CellaVision

What Is CellaVision's Debt?

You can click the graphic below for the historical numbers, but it shows that CellaVision had kr56.1m of debt in March 2024, down from kr95.6m, one year before. However, it does have kr167.0m in cash offsetting this, leading to net cash of kr110.9m.

A Look At CellaVision's Liabilities

The latest balance sheet data shows that CellaVision had liabilities of kr122.0m due within a year, and liabilities of kr93.3m falling due after that. On the other hand, it had cash of kr167.0m and kr103.2m worth of receivables due within a year. So it actually has kr54.9m more liquid assets than total liabilities.

Having regard to CellaVision's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr6.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that CellaVision has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, CellaVision grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CellaVision can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CellaVision may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, CellaVision recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CellaVision has net cash of kr110.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So is CellaVision's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in CellaVision, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.