We Think Duroc (STO:DURC B) Has A Fair Chunk Of Debt

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. We note that Duroc AB (publ) (STO:DURC B) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Duroc

What Is Duroc's Debt?

You can click the graphic below for the historical numbers, but it shows that Duroc had kr211.9m of debt in March 2021, down from kr560.4m, one year before. However, because it has a cash reserve of kr136.5m, its net debt is less, at about kr75.4m.

How Healthy Is Duroc's Balance Sheet?

According to the last reported balance sheet, Duroc had liabilities of kr621.9m due within 12 months, and liabilities of kr397.9m due beyond 12 months. Offsetting these obligations, it had cash of kr136.5m as well as receivables valued at kr486.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr396.6m.

This deficit isn't so bad because Duroc is worth kr1.22b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Duroc's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Duroc had a loss before interest and tax, and actually shrunk its revenue by 15%, to kr2.9b. We would much prefer see growth.

Caveat Emptor

Not only did Duroc's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost kr57m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of kr141m and the profit of kr17m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Duroc you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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