Is RaySearch Laboratories (STO:RAY B) Using Too Much Debt?

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. Importantly, RaySearch Laboratories AB (publ) (STO:RAY B) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

How Much Debt Does RaySearch Laboratories Carry?

As you can see below, at the end of June 2022, RaySearch Laboratories had kr52.7m of debt, up from kr26.7m a year ago. Click the image for more detail. But it also has kr162.1m in cash to offset that, meaning it has kr109.4m net cash.

A Look At RaySearch Laboratories' Liabilities

The latest balance sheet data shows that RaySearch Laboratories had liabilities of kr560.5m due within a year, and liabilities of kr604.8m falling due after that. Offsetting these obligations, it had cash of kr162.1m as well as receivables valued at kr369.6m due within 12 months. So its liabilities total kr633.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since RaySearch Laboratories has a market capitalization of kr2.22b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, RaySearch Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to kr693m. We usually like to see faster growth from unprofitable companies, but each to their own.

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 kr26m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting RaySearch Laboratories insider transactions.

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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