Stock Analysis

Does 24SevenOffice Group (NGM:247) Have A Healthy Balance Sheet?

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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 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 note that 24SevenOffice Group AB (publ) (NGM:247) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 24SevenOffice Group

What Is 24SevenOffice Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 24SevenOffice Group had debt of kr246.4m, up from kr223.6m in one year. However, it does have kr207.1m in cash offsetting this, leading to net debt of about kr39.3m.

NGM:247 Debt to Equity History March 16th 2023

How Healthy Is 24SevenOffice Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that 24SevenOffice Group had liabilities of kr118.5m due within 12 months and liabilities of kr287.8m due beyond that. Offsetting this, it had kr207.1m in cash and kr64.5m in receivables that were due within 12 months. So its liabilities total kr134.7m more than the combination of its cash and short-term receivables.

24SevenOffice Group has a market capitalization of kr288.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since 24SevenOffice Group 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 24SevenOffice Group wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to kr257m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, 24SevenOffice Group still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr191m. 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 kr109m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example 24SevenOffice Group has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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