Is Slottsviken Fastighetsaktiebolag (NGM:SLOTT B) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Slottsviken Fastighetsaktiebolag (publ) (NGM:SLOTT B) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Slottsviken Fastighetsaktiebolag

What Is Slottsviken Fastighetsaktiebolag's Debt?

As you can see below, Slottsviken Fastighetsaktiebolag had kr25.7m of debt at December 2021, down from kr27.0m a year prior. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Slottsviken Fastighetsaktiebolag's Balance Sheet?

According to the last reported balance sheet, Slottsviken Fastighetsaktiebolag had liabilities of kr7.77m due within 12 months, and liabilities of kr37.0m due beyond 12 months. Offsetting this, it had kr505.0k in cash and kr2.04m in receivables that were due within 12 months. So it has liabilities totalling kr42.3m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr36.9m, we think shareholders really should watch Slottsviken Fastighetsaktiebolag's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Slottsviken Fastighetsaktiebolag'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.

Over 12 months, Slottsviken Fastighetsaktiebolag saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Slottsviken Fastighetsaktiebolag produced an earnings before interest and tax (EBIT) loss. Indeed, it lost kr319k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of kr744k and the profit of kr553k. So one might argue that there's still a chance it can get things on the right track. 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. For example, we've discovered 4 warning signs for Slottsviken Fastighetsaktiebolag (3 are a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.