Clinical Laserthermia Systems (STO:CLS B) Is Making Moderate Use Of Debt

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.' 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 note that Clinical Laserthermia Systems AB (publ) (STO:CLS B) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 Clinical Laserthermia Systems

What Is Clinical Laserthermia Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Clinical Laserthermia Systems had kr21.1m of debt, an increase on kr1.07m, over one year. However, it also had kr12.9m in cash, and so its net debt is kr8.28m.

A Look At Clinical Laserthermia Systems' Liabilities

We can see from the most recent balance sheet that Clinical Laserthermia Systems had liabilities of kr28.4m falling due within a year, and liabilities of kr440.0k due beyond that. On the other hand, it had cash of kr12.9m and kr2.03m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr13.9m.

Of course, Clinical Laserthermia Systems has a market capitalization of kr188.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Clinical Laserthermia Systems's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Clinical Laserthermia Systems had a loss before interest and tax, and actually shrunk its revenue by 71%, to kr1.6m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Clinical Laserthermia Systems's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr51m 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. However, it doesn't help that it burned through kr55m of cash over the last year. So in short it's a really risky stock. 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. We've identified 5 warning signs with Clinical Laserthermia Systems (at least 3 which are significant) , and understanding them should be part of your investment process.

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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