We Think Dignitana (STO:DIGN) Has A Fair Chunk Of Debt

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.' 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. Importantly, Dignitana AB (publ) (STO:DIGN) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dignitana

What Is Dignitana's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Dignitana had debt of kr22.5m, up from kr7.89m in one year. However, it also had kr11.3m in cash, and so its net debt is kr11.2m.

How Healthy Is Dignitana's Balance Sheet?

We can see from the most recent balance sheet that Dignitana had liabilities of kr26.8m falling due within a year, and liabilities of kr14.4m due beyond that. Offsetting this, it had kr11.3m in cash and kr6.77m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr23.1m.

Given Dignitana has a market capitalization of kr442.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Dignitana'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 wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to kr60m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Dignitana still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr42m 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. Another cause for caution is that is bled kr45m in negative free cash flow over the last twelve months. 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. For example, we've discovered 3 warning signs for Dignitana (2 are potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.