We Think Preservia Hyresfastigheter (NGM:PHYR B) Has A Fair Chunk Of Debt

Simply Wall St
January 09, 2022
Source: Shutterstock

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. Importantly, Preservia Hyresfastigheter AB (publ) (NGM:PHYR B) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Preservia Hyresfastigheter

What Is Preservia Hyresfastigheter's Debt?

As you can see below, at the end of October 2021, Preservia Hyresfastigheter had kr21.5m of debt, up from kr2.00m a year ago. Click the image for more detail. However, it also had kr6.03m in cash, and so its net debt is kr15.5m.

NGM:PHYR B Debt to Equity History January 9th 2022

A Look At Preservia Hyresfastigheter's Liabilities

According to the last reported balance sheet, Preservia Hyresfastigheter had liabilities of kr353.0k due within 12 months, and liabilities of kr21.7m due beyond 12 months. Offsetting this, it had kr6.03m in cash and kr304.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr15.7m.

While this might seem like a lot, it is not so bad since Preservia Hyresfastigheter has a market capitalization of kr45.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Preservia Hyresfastigheter'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.

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

Importantly, Preservia Hyresfastigheter had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr1.5m. 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. However, it doesn't help that it burned through kr1.9m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Preservia Hyresfastigheter (including 2 which shouldn't be ignored) .

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.

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