Is RaySearch Laboratories (STO:RAY B) A Risky Investment?

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.' 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. As with many other companies RaySearch Laboratories AB (publ) (STO:RAY B) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for RaySearch Laboratories

What Is RaySearch Laboratories's Net Debt?

As you can see below, RaySearch Laboratories had kr17.2m of debt at September 2021, down from kr162.7m a year prior. But it also has kr120.6m in cash to offset that, meaning it has kr103.4m net cash.

How Healthy Is RaySearch Laboratories' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RaySearch Laboratories had liabilities of kr345.4m due within 12 months and liabilities of kr162.2m due beyond that. Offsetting these obligations, it had cash of kr120.6m as well as receivables valued at kr317.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr69.5m.

Of course, RaySearch Laboratories has a market capitalization of kr1.42b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine RaySearch Laboratories's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, RaySearch Laboratories made a loss at the EBIT level, and saw its revenue drop to kr613m, which is a fall of 16%. We would much prefer see growth.

So How Risky Is RaySearch Laboratories?

While RaySearch Laboratories lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr36m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for RaySearch Laboratories you should be aware of.

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.