Is Obducat (NGM:OBDU B) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Obducat AB (publ) (NGM:OBDU B) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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.

View our latest analysis for Obducat

What Is Obducat's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Obducat had debt of kr19.5m, up from kr16.5m in one year. On the flip side, it has kr2.17m in cash leading to net debt of about kr17.3m.

A Look At Obducat's Liabilities

According to the last reported balance sheet, Obducat had liabilities of kr107.2m due within 12 months, and liabilities of kr3.27m due beyond 12 months. On the other hand, it had cash of kr2.17m and kr32.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr75.4m.

This deficit isn't so bad because Obducat is worth kr201.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Obducat 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 Obducat wasn't profitable at an EBIT level, but managed to grow its revenue by 82%, to kr58m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Obducat still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr11m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr9.5m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For instance, we've identified 3 warning signs for Obducat (1 is a bit unpleasant) 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.