Is 24SevenOffice Scandinavia (NGM:247) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that 24SevenOffice Scandinavia AB (publ) (NGM:247) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for 24SevenOffice Scandinavia

How Much Debt Does 24SevenOffice Scandinavia Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 24SevenOffice Scandinavia had kr24.9m of debt, an increase on none, over one year. But on the other hand it also has kr111.3m in cash, leading to a kr86.3m net cash position.

A Look At 24SevenOffice Scandinavia's Liabilities

The latest balance sheet data shows that 24SevenOffice Scandinavia had liabilities of kr53.3m due within a year, and liabilities of kr24.9m falling due after that. Offsetting these obligations, it had cash of kr111.3m as well as receivables valued at kr28.2m due within 12 months. So it actually has kr61.2m more liquid assets than total liabilities.

Having regard to 24SevenOffice Scandinavia's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr3.13b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that 24SevenOffice Scandinavia has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if 24SevenOffice Scandinavia can strengthen its balance sheet over time. 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 kr170m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is 24SevenOffice Scandinavia?

While 24SevenOffice Scandinavia lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr12m. 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 25% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for 24SevenOffice Scandinavia 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. 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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