Is Inhalation Sciences Sweden (NGM:ISAB) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Inhalation Sciences Sweden AB (publ) (NGM:ISAB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Inhalation Sciences Sweden

What Is Inhalation Sciences Sweden's Debt?

As you can see below, at the end of March 2020, Inhalation Sciences Sweden had kr14.7m of debt, up from kr6.80m a year ago. Click the image for more detail. However, because it has a cash reserve of kr3.64m, its net debt is less, at about kr11.1m.

A Look At Inhalation Sciences Sweden's Liabilities

We can see from the most recent balance sheet that Inhalation Sciences Sweden had liabilities of kr16.3m falling due within a year, and liabilities of kr2.10m due beyond that. On the other hand, it had cash of kr3.64m and kr4.28m worth of receivables due within a year. So it has liabilities totalling kr10.5m more than its cash and near-term receivables, combined.

Of course, Inhalation Sciences Sweden has a market capitalization of kr103.6m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Inhalation Sciences Sweden'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 Inhalation Sciences Sweden wasn't profitable at an EBIT level, but managed to grow its revenue by 130%, to kr14m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly savour Inhalation Sciences Sweden's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost kr3.9m 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. However, it doesn't help that it burned through kr11.8m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Inhalation Sciences Sweden (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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