Is Nexam Chemical Holding (STO:NEXAM) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Nexam Chemical Holding AB (publ) (STO:NEXAM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Nexam Chemical Holding

What Is Nexam Chemical Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nexam Chemical Holding had kr24.7m of debt in December 2021, down from kr35.4m, one year before. But on the other hand it also has kr63.6m in cash, leading to a kr38.9m net cash position.

A Look At Nexam Chemical Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Nexam Chemical Holding had liabilities of kr41.5m due within 12 months and liabilities of kr14.7m due beyond that. Offsetting this, it had kr63.6m in cash and kr41.8m in receivables that were due within 12 months. So it actually has kr49.1m more liquid assets than total liabilities.

This surplus suggests that Nexam Chemical Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nexam Chemical Holding has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nexam Chemical Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Nexam Chemical Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to kr219m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Nexam Chemical Holding?

Although Nexam Chemical Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr1.3m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 32% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nexam Chemical Holding is showing 3 warning signs in our investment analysis , 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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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.