Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dignitana AB (publ.) (STO:DIGN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Dignitana AB (publ.)
How Much Debt Does Dignitana AB (publ.) Carry?
As you can see below, at the end of December 2021, Dignitana AB (publ.) had kr23.6m of debt, up from kr9.63m a year ago. Click the image for more detail. However, it does have kr14.5m in cash offsetting this, leading to net debt of about kr9.09m.
How Strong Is Dignitana AB (publ.)'s Balance Sheet?
The latest balance sheet data shows that Dignitana AB (publ.) had liabilities of kr24.3m due within a year, and liabilities of kr15.9m falling due after that. Offsetting these obligations, it had cash of kr14.5m as well as receivables valued at kr6.03m due within 12 months. So its liabilities total kr19.6m more than the combination of its cash and short-term receivables.
Since publicly traded Dignitana AB (publ.) shares are worth a total of kr432.0m, it seems unlikely that this level of liabilities would be a major threat. 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 future earnings, more than anything, that will determine Dignitana AB (publ.)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Dignitana AB (publ.) wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to kr62m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Dignitana AB (publ.) still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr42m at the EBIT level. 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 kr54m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Dignitana AB (publ.) (at least 1 which can't be ignored) , and understanding them should be part of your investment process.
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.
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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.
About OM:DIGN
Dignitana
A medical technology company, engages in the development, production, and marketing of medical cooling devices in the United States and internationally.
Undervalued with high growth potential.