Here's Why Preservia Hyresfastigheter (NGM:PHYR B) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Preservia Hyresfastigheter AB (publ) (NGM:PHYR B) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that PHYR B is potentially overvalued!

How Much Debt Does Preservia Hyresfastigheter Carry?

As you can see below, at the end of April 2022, Preservia Hyresfastigheter had kr19.6m of debt, up from kr18.2m a year ago. Click the image for more detail. However, it does have kr957.0k in cash offsetting this, leading to net debt of about kr18.6m.

How Healthy Is Preservia Hyresfastigheter's Balance Sheet?

According to the last reported balance sheet, Preservia Hyresfastigheter had liabilities of kr416.0k due within 12 months, and liabilities of kr19.6m due beyond 12 months. Offsetting this, it had kr957.0k in cash and kr87.0k in receivables that were due within 12 months. So it has liabilities totalling kr18.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr28.4m, so it does suggest shareholders should keep an eye on Preservia Hyresfastigheter's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Preservia Hyresfastigheter will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

It seems likely shareholders hope that Preservia Hyresfastigheter can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Over the last twelve months Preservia Hyresfastigheter produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr698k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr6.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Preservia Hyresfastigheter is showing 4 warning signs in our investment analysis , you should know about...

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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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.