Is Midsummer (STO:MIDS) A Risky Investment?

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 note that Midsummer AB (publ) (STO:MIDS) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for Midsummer

How Much Debt Does Midsummer Carry?

As you can see below, Midsummer had kr213.9m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of kr124.1m, its net debt is less, at about kr89.8m.

A Look At Midsummer's Liabilities

According to the last reported balance sheet, Midsummer had liabilities of kr25.3m due within 12 months, and liabilities of kr206.1m due beyond 12 months. On the other hand, it had cash of kr124.1m and kr95.2m worth of receivables due within a year. So its liabilities total kr12.0m more than the combination of its cash and short-term receivables.

Having regard to Midsummer's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr1.01b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Midsummer's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Midsummer made a loss at the EBIT level, and saw its revenue drop to kr108m, which is a fall of 7.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Midsummer had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr96m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr114m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 instance, we've identified 3 warning signs for Midsummer (2 are concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.