Health Check: How Prudently Does Advenica (STO:ADVE) Use Debt?

Warren Buffett famously said, '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. Importantly, Advenica AB (publ) (STO:ADVE) does carry debt. But should shareholders be worried about its use of debt?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Advenica

What Is Advenica's Debt?

As you can see below, at the end of June 2021, Advenica had kr15.0m of debt, up from kr10.0m a year ago. Click the image for more detail. But on the other hand it also has kr35.6m in cash, leading to a kr20.6m net cash position.

How Healthy Is Advenica's Balance Sheet?

The latest balance sheet data shows that Advenica had liabilities of kr58.1m due within a year, and liabilities of kr18.1m falling due after that. Offsetting these obligations, it had cash of kr35.6m as well as receivables valued at kr14.6m due within 12 months. So its liabilities total kr26.0m more than the combination of its cash and short-term receivables.

Of course, Advenica has a market capitalization of kr656.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Advenica 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 Advenica's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Advenica made a loss at the EBIT level, and saw its revenue drop to kr77m, which is a fall of 3.5%. We would much prefer see growth.

So How Risky Is Advenica?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Advenica had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr20m and booked a kr27m accounting loss. Given it only has net cash of kr20.6m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 4 warning signs we've spotted with Advenica (including 1 which can't be ignored) .

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.
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