Is RaySearch Laboratories (STO:RAY B) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, RaySearch Laboratories AB (publ) (STO:RAY B) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, 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 think about a company's use of debt, we first look at 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 kr25.1m of debt at December 2020, down from kr49.5m a year prior. However, its balance sheet shows it holds kr168.7m in cash, so it actually has kr143.6m net cash.

A Look At RaySearch Laboratories' Liabilities

The latest balance sheet data shows that RaySearch Laboratories had liabilities of kr428.0m due within a year, and liabilities of kr162.5m falling due after that. Offsetting these obligations, it had cash of kr168.7m as well as receivables valued at kr399.3m due within 12 months. So it has liabilities totalling kr22.5m more than its cash and near-term receivables, combined.

Having regard to RaySearch Laboratories' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr3.04b company is short on cash, but still worth keeping an eye on the balance sheet. 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 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.

Over 12 months, RaySearch Laboratories made a loss at the EBIT level, and saw its revenue drop to kr652m, which is a fall of 12%. 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 kr498m. 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. For riskier companies like RaySearch Laboratories I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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