Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sotkamo Silver AB (NGM:SOSI) makes use of 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out the opportunities and risks within the SE Metals and Mining industry.
What Is Sotkamo Silver's Net Debt?
As you can see below, Sotkamo Silver had kr245.7m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr42.7m in cash offsetting this, leading to net debt of about kr203.0m.
How Healthy Is Sotkamo Silver's Balance Sheet?
According to the last reported balance sheet, Sotkamo Silver had liabilities of kr113.6m due within 12 months, and liabilities of kr287.5m due beyond 12 months. On the other hand, it had cash of kr42.7m and kr25.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr333.4m.
This deficit casts a shadow over the kr102.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sotkamo Silver would probably need a major re-capitalization if its creditors were to demand repayment. 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 Sotkamo Silver'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, Sotkamo Silver made a loss at the EBIT level, and saw its revenue drop to kr392m, which is a fall of 6.5%. We would much prefer see growth.
Caveat Emptor
Importantly, Sotkamo Silver had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr4.1m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of kr11m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Sotkamo Silver , and understanding them should be part of your investment process.
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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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.
About NGM:SOSI
Sotkamo Silver
A mining and ore prospecting company, develops and utilizes mineral deposits in the Kainuu region in Finland.
Reasonable growth potential low.