Health Check: How Prudently Does New Bubbleroom Sweden (STO:BBROOM) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that New Bubbleroom Sweden AB (publ) (STO:BBROOM) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for New Bubbleroom Sweden

How Much Debt Does New Bubbleroom Sweden Carry?

You can click the graphic below for the historical numbers, but it shows that New Bubbleroom Sweden had kr22.1m of debt in September 2024, down from kr28.0m, one year before. However, its balance sheet shows it holds kr34.5m in cash, so it actually has kr12.4m net cash.

A Look At New Bubbleroom Sweden's Liabilities

Zooming in on the latest balance sheet data, we can see that New Bubbleroom Sweden had liabilities of kr97.2m due within 12 months and liabilities of kr16.2m due beyond that. Offsetting this, it had kr34.5m in cash and kr41.3m in receivables that were due within 12 months. So it has liabilities totalling kr37.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since New Bubbleroom Sweden has a market capitalization of kr63.4m, 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. While it does have liabilities worth noting, New Bubbleroom Sweden also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is New Bubbleroom Sweden'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.

In the last year New Bubbleroom Sweden wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to kr460m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is New Bubbleroom Sweden?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months New Bubbleroom Sweden lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr7.1m of cash and made a loss of kr22m. But the saving grace is the kr12.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - New Bubbleroom Sweden has 4 warning signs we think 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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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.