Is Slottsviken Fastighetsaktiebolag (NGM:SLOTT B) Using Too Much Debt?

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.' 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. We can see that Slottsviken Fastighetsaktiebolag (publ) (NGM:SLOTT B) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Slottsviken Fastighetsaktiebolag

What Is Slottsviken Fastighetsaktiebolag's Net Debt?

The chart below, which you can click on for greater detail, shows that Slottsviken Fastighetsaktiebolag had kr27.0m in debt in December 2020; about the same as the year before. On the flip side, it has kr1.62m in cash leading to net debt of about kr25.3m.

How Healthy Is Slottsviken Fastighetsaktiebolag's Balance Sheet?

We can see from the most recent balance sheet that Slottsviken Fastighetsaktiebolag had liabilities of kr8.50m falling due within a year, and liabilities of kr33.1m due beyond that. On the other hand, it had cash of kr1.62m and kr3.91m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr36.0m.

When you consider that this deficiency exceeds the company's kr25.3m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Slottsviken Fastighetsaktiebolag will need earnings to service that debt. 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 Slottsviken Fastighetsaktiebolag had a loss before interest and tax, and actually shrunk its revenue by 70%, to kr6.7m. That makes us nervous, to say the least.

Caveat Emptor

While Slottsviken Fastighetsaktiebolag's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost kr1.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of kr157k over the last twelve months. So suffice it to say we consider the stock to be 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. For instance, we've identified 3 warning signs for Slottsviken Fastighetsaktiebolag that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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