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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. As with many other companies Karolinska Development AB (publ) (STO:KDEV) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Karolinska Development
How Much Debt Does Karolinska Development Carry?
As you can see below, at the end of March 2021, Karolinska Development had kr77.3m of debt, up from kr70.0m a year ago. Click the image for more detail. However, it does have kr101.6m in cash offsetting this, leading to net cash of kr24.3m.
A Look At Karolinska Development's Liabilities
The latest balance sheet data shows that Karolinska Development had liabilities of kr11.1m due within a year, and liabilities of kr77.3m falling due after that. Offsetting these obligations, it had cash of kr101.6m as well as receivables valued at kr2.08m due within 12 months. So it actually has kr15.3m more liquid assets than total liabilities.
This state of affairs indicates that Karolinska Development's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr842.0m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Karolinska Development boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Karolinska Development'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 Karolinska Development had a loss before interest and tax, and actually shrunk its revenue by 39%, to kr2.2m. To be frank that doesn't bode well.
So How Risky Is Karolinska Development?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Karolinska Development 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 kr5.7m and booked a kr106m accounting loss. With only kr24.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 warning signs for Karolinska Development (1 is concerning) you should be aware of.
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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Access Free AnalysisThis 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.
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About OM:KDV B
KDventures
A venture capital firm specializing in investments in growth capital, seed stage, and early stage companies.
Flawless balance sheet with slight risk.
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