Is Alleima (STO:ALLEI) A Risky Investment?

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 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. Importantly, Alleima AB (publ) (STO:ALLEI) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alleima

What Is Alleima's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Alleima had kr983.0m of debt, an increase on kr542.0m, over one year. But on the other hand it also has kr1.78b in cash, leading to a kr798.0m net cash position.

How Strong Is Alleima's Balance Sheet?

According to the last reported balance sheet, Alleima had liabilities of kr4.45b due within 12 months, and liabilities of kr2.33b due beyond 12 months. Offsetting this, it had kr1.78b in cash and kr3.61b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr1.39b.

Of course, Alleima has a market capitalization of kr19.3b, 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. Despite its noteworthy liabilities, Alleima boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Alleima's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alleima 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Alleima has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Alleima produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Alleima's liabilities, but we can be reassured by the fact it has has net cash of kr798.0m. So we don't have any problem with Alleima's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Alleima insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.