Does RaySearch Laboratories (STO:RAY B) Have A Healthy Balance Sheet?

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 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. As with many other companies RaySearch Laboratories AB (publ) (STO:RAY B) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 RaySearch Laboratories

How Much Debt Does RaySearch Laboratories Carry?

The image below, which you can click on for greater detail, shows that at March 2023 RaySearch Laboratories had debt of kr57.3m, up from kr50.5m in one year. However, its balance sheet shows it holds kr243.7m in cash, so it actually has kr186.5m net cash.

How Strong Is RaySearch Laboratories' Balance Sheet?

The latest balance sheet data shows that RaySearch Laboratories had liabilities of kr619.8m due within a year, and liabilities of kr591.2m falling due after that. On the other hand, it had cash of kr243.7m and kr388.2m worth of receivables due within a year. So its liabilities total kr579.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because RaySearch Laboratories is worth kr1.96b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, RaySearch Laboratories also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, RaySearch Laboratories made a loss at the EBIT level, last year, but improved that to positive EBIT of kr24m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if RaySearch Laboratories can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While RaySearch Laboratories has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, RaySearch Laboratories actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While RaySearch Laboratories does have more liabilities than liquid assets, it also has net cash of kr186.5m. The cherry on top was that in converted 651% of that EBIT to free cash flow, bringing in kr159m. So we don't have any problem with RaySearch Laboratories's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with RaySearch Laboratories (including 1 which is significant) .

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.