Does Paxman (STO:PAX) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Paxman AB (publ) (STO:PAX) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Paxman

How Much Debt Does Paxman Carry?

You can click the graphic below for the historical numbers, but it shows that Paxman had kr18.7m of debt in September 2023, down from kr19.8m, one year before. However, its balance sheet shows it holds kr24.3m in cash, so it actually has kr5.52m net cash.

How Strong Is Paxman's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Paxman had liabilities of kr54.4m due within 12 months and liabilities of kr3.10m due beyond that. On the other hand, it had cash of kr24.3m and kr46.7m worth of receivables due within a year. So it actually has kr13.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Paxman could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Paxman boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Paxman improved its EBIT from a last year's loss to a positive kr17m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Paxman can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Paxman may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Paxman saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Paxman has kr5.52m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Paxman's balance sheet. 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. Case in point: We've spotted 3 warning signs for Paxman you should be aware of, and 1 of them is a bit concerning.

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. 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.