David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Paynova AB (NGM:PAY) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
Check out our latest analysis for Paynova
What Is Paynova's Net Debt?
As you can see below, at the end of September 2021, Paynova had kr58.4m of debt, up from kr20.5m a year ago. Click the image for more detail. On the flip side, it has kr27.0m in cash leading to net debt of about kr31.4m.
How Healthy Is Paynova's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Paynova had liabilities of kr121.1m due within 12 months and liabilities of kr29.7m due beyond that. Offsetting this, it had kr27.0m in cash and kr29.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr94.3m.
This deficit is considerable relative to its market capitalization of kr122.7m, so it does suggest shareholders should keep an eye on Paynova's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Paynova 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.
In the last year Paynova had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to kr42m. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Paynova produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping kr48m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr51m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 7 warning signs for Paynova you should be aware of, and 2 of them are a bit unpleasant.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About OM:SILEON
Moderate with mediocre balance sheet.
