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.' 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. We can see that RaySearch Laboratories AB (publ) (STO:RAY B) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for RaySearch Laboratories

How Much Debt Does RaySearch Laboratories Carry?

You can click the graphic below for the historical numbers, but it shows that RaySearch Laboratories had kr26.7m of debt in June 2021, down from kr173.9m, one year before. However, its balance sheet shows it holds kr128.8m in cash, so it actually has kr102.1m net cash.

How Strong Is RaySearch Laboratories' Balance Sheet?

According to the last reported balance sheet, RaySearch Laboratories had liabilities of kr337.0m due within 12 months, and liabilities of kr164.5m due beyond 12 months. On the other hand, it had cash of kr128.8m and kr320.9m worth of receivables due within a year. So it has liabilities totalling kr51.8m more than its cash and near-term receivables, combined.

Since publicly traded RaySearch Laboratories shares are worth a total of kr2.25b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, RaySearch Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year RaySearch Laboratories had a loss before interest and tax, and actually shrunk its revenue by 21%, to kr596m. That makes us nervous, to say the least.

So How Risky Is RaySearch Laboratories?

Although RaySearch Laboratories had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr67m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that RaySearch Laboratories is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.