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

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 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.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dignitana AB (publ.)

How Much Debt Does Dignitana AB (publ.) Carry?

The chart below, which you can click on for greater detail, shows that Dignitana AB (publ.) had kr16.3m in debt in June 2021; about the same as the year before. However, it does have kr36.3m in cash offsetting this, leading to net cash of kr20.0m.

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

The latest balance sheet data shows that Dignitana AB (publ.) had liabilities of kr22.5m due within a year, and liabilities of kr11.9m falling due after that. Offsetting these obligations, it had cash of kr36.3m as well as receivables valued at kr6.83m due within 12 months. So it can boast kr8.76m more liquid assets than total liabilities.

This state of affairs indicates that Dignitana AB (publ.)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr588.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Dignitana AB (publ.) has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dignitana AB (publ.)'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 Dignitana AB (publ.) wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to kr51m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Dignitana AB (publ.)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Dignitana AB (publ.) had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through kr47m of cash and made a loss of kr48m. Given it only has net cash of kr20.0m, the company may need to raise more capital if it doesn't reach break-even soon. Dignitana AB (publ.)'s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Dignitana AB (publ.) has 5 warning signs (and 2 which are potentially serious) we think you should know about.

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.

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.

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