Health Check: How Prudently Does OrganoClick (STO:ORGC) Use Debt?

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 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, OrganoClick AB (publ) (STO:ORGC) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, 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 OrganoClick

How Much Debt Does OrganoClick Carry?

The image below, which you can click on for greater detail, shows that OrganoClick had debt of kr17.2m at the end of December 2021, a reduction from kr18.4m over a year. But it also has kr34.2m in cash to offset that, meaning it has kr17.1m net cash.

How Strong Is OrganoClick's Balance Sheet?

The latest balance sheet data shows that OrganoClick had liabilities of kr54.4m due within a year, and liabilities of kr26.3m falling due after that. On the other hand, it had cash of kr34.2m and kr14.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr32.2m.

Of course, OrganoClick has a market capitalization of kr351.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, OrganoClick also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine OrganoClick'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.

In the last year OrganoClick wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to kr110m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is OrganoClick?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year OrganoClick had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through kr52m of cash and made a loss of kr33m. But at least it has kr17.1m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 4 warning signs with OrganoClick , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.