Would Inhalation Sciences Sweden (NGM:ISAB) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Inhalation Sciences Sweden AB (publ) (NGM:ISAB) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Inhalation Sciences Sweden

What Is Inhalation Sciences Sweden's Net Debt?

As you can see below, at the end of December 2019, Inhalation Sciences Sweden had kr14.8m of debt, up from kr5.97m a year ago. Click the image for more detail. On the flip side, it has kr4.80m in cash leading to net debt of about kr10.0m.

A Look At Inhalation Sciences Sweden's Liabilities

We can see from the most recent balance sheet that Inhalation Sciences Sweden had liabilities of kr16.0m falling due within a year, and liabilities of kr1.99m due beyond that. On the other hand, it had cash of kr4.80m and kr2.20m worth of receivables due within a year. So it has liabilities totalling kr11.0m more than its cash and near-term receivables, combined.

Given Inhalation Sciences Sweden has a market capitalization of kr77.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Inhalation Sciences Sweden's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Inhalation Sciences Sweden wasn't profitable at an EBIT level, but managed to grow its revenue by 64%, to kr8.9m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Inhalation Sciences Sweden still had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping kr7.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr12m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 6 warning signs for Inhalation Sciences Sweden (of which 4 are significant!) you should know about.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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