Zordix (STO:ZORDIX B) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Zordix AB (publ) (STO:ZORDIX B) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zordix

What Is Zordix's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Zordix had kr278.4m of debt, an increase on kr100.0m, over one year. However, it does have kr73.9m in cash offsetting this, leading to net debt of about kr204.5m.

How Healthy Is Zordix's Balance Sheet?

According to the last reported balance sheet, Zordix had liabilities of kr209.5m due within 12 months, and liabilities of kr761.2m due beyond 12 months. On the other hand, it had cash of kr73.9m and kr120.2m worth of receivables due within a year. So its liabilities total kr776.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of kr535.6m, we think shareholders really should watch Zordix's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zordix's ability to maintain a healthy balance sheet going forward. 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 Zordix wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to kr1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Zordix still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr105m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr233m over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 4 warning signs for Zordix that you should be aware of.

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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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.