Nexam Chemical Holding (STO:NEXAM) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Nexam Chemical Holding AB (publ) (STO:NEXAM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nexam Chemical Holding

How Much Debt Does Nexam Chemical Holding Carry?

The image below, which you can click on for greater detail, shows that Nexam Chemical Holding had debt of kr28.8m at the end of March 2021, a reduction from kr46.8m over a year. But on the other hand it also has kr61.6m in cash, leading to a kr32.8m net cash position.

How Strong Is Nexam Chemical Holding's Balance Sheet?

According to the last reported balance sheet, Nexam Chemical Holding had liabilities of kr46.3m due within 12 months, and liabilities of kr24.5m due beyond 12 months. Offsetting these obligations, it had cash of kr61.6m as well as receivables valued at kr41.3m due within 12 months. So it actually has kr32.1m 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. Succinctly put, Nexam Chemical Holding boasts net cash, 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 it is future earnings, more than anything, that will determine Nexam Chemical Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Nexam Chemical Holding reported revenue of kr177m, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nexam Chemical Holding?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Nexam Chemical Holding had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr16m and booked a kr8.1m accounting loss. With only kr32.8m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Nexam Chemical Holding may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 1 warning sign for Nexam Chemical Holding you should be aware of.

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.

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This article by Simply Wall St is general in nature. 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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