Is New Bubbleroom Sweden (STO:BBROOM) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, New Bubbleroom Sweden AB (publ) (STO:BBROOM) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 New Bubbleroom Sweden

What Is New Bubbleroom Sweden's Net Debt?

As you can see below, New Bubbleroom Sweden had kr25.1m of debt at March 2024, down from kr32.5m a year prior. But on the other hand it also has kr51.3m in cash, leading to a kr26.2m net cash position.

How Healthy Is New Bubbleroom Sweden's Balance Sheet?

We can see from the most recent balance sheet that New Bubbleroom Sweden had liabilities of kr103.6m falling due within a year, and liabilities of kr19.2m due beyond that. Offsetting these obligations, it had cash of kr51.3m as well as receivables valued at kr42.1m due within 12 months. So it has liabilities totalling kr29.3m more than its cash and near-term receivables, combined.

New Bubbleroom Sweden has a market capitalization of kr77.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 you can't view debt in total isolation; since New Bubbleroom Sweden will need earnings to service that debt. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is New Bubbleroom Sweden?

While New Bubbleroom Sweden lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr476k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with New Bubbleroom Sweden , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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