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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, 24SevenOffice Scandinavia AB (publ) (NGM:247) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for 24SevenOffice Scandinavia

What Is 24SevenOffice Scandinavia's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 24SevenOffice Scandinavia had debt of kr268.0m, up from kr24.5m in one year. But on the other hand it also has kr595.1m in cash, leading to a kr327.0m net cash position.

How Strong Is 24SevenOffice Scandinavia's Balance Sheet?

The latest balance sheet data shows that 24SevenOffice Scandinavia had liabilities of kr62.9m due within a year, and liabilities of kr268.4m falling due after that. On the other hand, it had cash of kr595.1m and kr33.4m worth of receivables due within a year. So it can boast kr297.2m 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!

Notably, 24SevenOffice Scandinavia made a loss at the EBIT level, last year, but improved that to positive EBIT of kr5.7m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is 24SevenOffice Scandinavia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While 24SevenOffice Scandinavia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, 24SevenOffice Scandinavia saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that 24SevenOffice Scandinavia has net cash of kr327.0m, as well as more liquid assets than liabilities. So we are not troubled with 24SevenOffice Scandinavia's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example 24SevenOffice Scandinavia has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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