Is Midsummer (STO:MIDS) Weighed On By Its Debt Load?

Warren Buffett famously said, '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. Importantly, Midsummer AB (publ) (STO:MIDS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Midsummer

What Is Midsummer's Debt?

As you can see below, at the end of September 2024, Midsummer had kr237.1m of debt, up from kr218.9m a year ago. Click the image for more detail. However, because it has a cash reserve of kr38.7m, its net debt is less, at about kr198.4m.

How Healthy Is Midsummer's Balance Sheet?

The latest balance sheet data shows that Midsummer had liabilities of kr94.9m due within a year, and liabilities of kr244.4m falling due after that. Offsetting this, it had kr38.7m in cash and kr51.2m in receivables that were due within 12 months. So it has liabilities totalling kr249.4m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr242.8m, we think shareholders really should watch Midsummer's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Midsummer wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to kr81m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Midsummer managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping kr142m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr79m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Midsummer (1 is a bit unpleasant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.