Does Svenska Aerogel Holding (STO:AERO) Have A Healthy Balance Sheet?

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.' 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. Importantly, Svenska Aerogel Holding AB (publ) (STO:AERO) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Svenska Aerogel Holding

What Is Svenska Aerogel Holding's Net Debt?

As you can see below, Svenska Aerogel Holding had kr22.6m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had kr21.6m in cash, and so its net debt is kr1.03m.

A Look At Svenska Aerogel Holding's Liabilities

We can see from the most recent balance sheet that Svenska Aerogel Holding had liabilities of kr13.7m falling due within a year, and liabilities of kr23.1m due beyond that. Offsetting this, it had kr21.6m in cash and kr1.76m in receivables that were due within 12 months. So it has liabilities totalling kr13.5m more than its cash and near-term receivables, combined.

Of course, Svenska Aerogel Holding has a market capitalization of kr133.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Svenska Aerogel Holding has virtually no net debt, 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 you can't view debt in total isolation; since Svenska Aerogel Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Svenska Aerogel Holding reported revenue of kr1.0m, which is a gain of 44%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Over the last twelve months Svenska Aerogel Holding produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr36m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr41m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Svenska Aerogel Holding has 5 warning signs (and 3 which are significant) we think 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.

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