Slottsviken Fastighetsaktiebolag (NGM:SLOTT B) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Slottsviken Fastighetsaktiebolag (publ) (NGM:SLOTT B) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Slottsviken Fastighetsaktiebolag

What Is Slottsviken Fastighetsaktiebolag's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Slottsviken Fastighetsaktiebolag had kr26.4m of debt in September 2020, down from kr27.7m, one year before. On the flip side, it has kr1.25m in cash leading to net debt of about kr25.1m.

How Strong Is Slottsviken Fastighetsaktiebolag's Balance Sheet?

We can see from the most recent balance sheet that Slottsviken Fastighetsaktiebolag had liabilities of kr7.07m falling due within a year, and liabilities of kr32.3m due beyond that. On the other hand, it had cash of kr1.25m and kr644.0k worth of receivables due within a year. So it has liabilities totalling kr37.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr26.1m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Slottsviken Fastighetsaktiebolag's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Slottsviken Fastighetsaktiebolag made a loss at the EBIT level, and saw its revenue drop to kr7.5m, which is a fall of 65%. To be frank that doesn't bode well.

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 kr572k 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. For example, we would not want to see a repeat of last year's loss of kr1.3m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Slottsviken Fastighetsaktiebolag , and understanding them should be part of your investment process.

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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