Dignitana AB (publ.) (STO:DIGN) Has Debt But No Earnings; Should You Worry?

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 note that Dignitana AB (publ.) (STO:DIGN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Dignitana AB (publ.)

What Is Dignitana AB (publ.)'s Net Debt?

As you can see below, at the end of September 2020, Dignitana AB (publ.) had kr13.1m of debt, up from kr10.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr14.8m in cash, so it actually has kr1.70m net cash.

How Healthy Is Dignitana AB (publ.)'s Balance Sheet?

According to the last reported balance sheet, Dignitana AB (publ.) had liabilities of kr52.8m due within 12 months, and liabilities of kr3.61m due beyond 12 months. Offsetting these obligations, it had cash of kr14.8m as well as receivables valued at kr5.89m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr35.8m.

Of course, Dignitana AB (publ.) has a market capitalization of kr532.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Dignitana AB (publ.) also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dignitana AB (publ.)'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 Dignitana AB (publ.) wasn't profitable at an EBIT level, but managed to grow its revenue by 8.6%, to kr43m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Dignitana AB (publ.)?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Dignitana AB (publ.) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr30m of cash and made a loss of kr47m. Given it only has net cash of kr1.70m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example Dignitana AB (publ.) has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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. 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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