Svenska Aerogel Holding (STO:AERO) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Svenska Aerogel Holding AB (publ) (STO:AERO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Svenska Aerogel Holding

What Is Svenska Aerogel Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Svenska Aerogel Holding had debt of kr21.3m at the end of June 2021, a reduction from kr22.6m over a year. However, it also had kr19.8m in cash, and so its net debt is kr1.43m.

How Strong Is Svenska Aerogel Holding's Balance Sheet?

The latest balance sheet data shows that Svenska Aerogel Holding had liabilities of kr16.8m due within a year, and liabilities of kr21.3m falling due after that. On the other hand, it had cash of kr19.8m and kr2.03m worth of receivables due within a year. So it has liabilities totalling kr16.3m more than its cash and near-term receivables, combined.

Since publicly traded Svenska Aerogel Holding shares are worth a total of kr96.7m, 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. Carrying virtually no net debt, Svenska Aerogel Holding has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Svenska Aerogel Holding's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Svenska Aerogel Holding reported revenue of kr1.4m, which is a gain of 121%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Importantly, Svenska Aerogel Holding had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr37m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr36m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Svenska Aerogel Holding has 6 warning signs (and 4 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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