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 can see that 24SevenOffice Scandinavia AB (publ) (NGM:247) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is 24SevenOffice Scandinavia’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 24SevenOffice Scandinavia had kr24.9m of debt, an increase on none, over one year. But it also has kr127.1m in cash to offset that, meaning it has kr102.2m net cash.
A Look At 24SevenOffice Scandinavia’s Liabilities
We can see from the most recent balance sheet that 24SevenOffice Scandinavia had liabilities of kr55.5m falling due within a year, and liabilities of kr24.9m due beyond that. On the other hand, it had cash of kr127.1m and kr25.7m worth of receivables due within a year. So it can boast kr72.4m more liquid assets than total liabilities.
This short term liquidity is a sign that 24SevenOffice Scandinavia could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 24SevenOffice Scandinavia boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine 24SevenOffice Scandinavia’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, 24SevenOffice Scandinavia reported revenue of kr164m, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is 24SevenOffice Scandinavia?
Although 24SevenOffice Scandinavia had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr18m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. Keeping in mind its 30% revenue growth over the last year, we think there’s a decent chance the company is on track. There’s no doubt fast top line growth can cure all manner of ills, for a 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, we’ve discovered 2 warning signs for 24SevenOffice Scandinavia that you should be aware of before investing here.
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. 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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