We Think Sotkamo Silver (NGM:SOSI) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Sotkamo Silver AB (NGM:SOSI) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sotkamo Silver

What Is Sotkamo Silver's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sotkamo Silver had kr272.6m of debt in September 2020, down from kr310.3m, one year before. On the flip side, it has kr30.0m in cash leading to net debt of about kr242.6m.

A Look At Sotkamo Silver's Liabilities

According to the last reported balance sheet, Sotkamo Silver had liabilities of kr104.0m due within 12 months, and liabilities of kr339.5m due beyond 12 months. Offsetting this, it had kr30.0m in cash and kr43.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr370.2m.

While this might seem like a lot, it is not so bad since Sotkamo Silver has a market capitalization of kr719.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sotkamo Silver can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sotkamo Silver wasn't profitable at an EBIT level, but managed to grow its revenue by 236%, to kr380m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though Sotkamo Silver managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost kr3.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of kr73m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sotkamo Silver has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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