Swedencare (STO:SECARE) Has A Rock Solid Balance Sheet

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.' 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 Swedencare AB (publ) (STO:SECARE) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Swedencare

What Is Swedencare's Net Debt?

As you can see below, at the end of June 2021, Swedencare had kr230.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds kr1.26b in cash, so it actually has kr1.03b net cash.

A Look At Swedencare's Liabilities

The latest balance sheet data shows that Swedencare had liabilities of kr85.9m due within a year, and liabilities of kr257.4m falling due after that. Offsetting these obligations, it had cash of kr1.26b as well as receivables valued at kr74.0m due within 12 months. So it can boast kr991.7m more liquid assets than total liabilities.

This surplus suggests that Swedencare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Swedencare has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Swedencare grew its EBIT by 260% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Swedencare can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Swedencare may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Swedencare recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Swedencare has net cash of kr1.03b, as well as more liquid assets than liabilities. And we liked the look of last year's 260% year-on-year EBIT growth. So we don't think Swedencare's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Swedencare that you should be aware of before investing here.

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.

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.

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