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 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. As with many other companies Hoylu AB (publ) (STO:HOYLU) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Hoylu Carry?
As you can see below, at the end of December 2021, Hoylu had kr20.0m of debt, up from kr1.71m a year ago. Click the image for more detail. However, because it has a cash reserve of kr4.29m, its net debt is less, at about kr15.8m.
How Healthy Is Hoylu's Balance Sheet?
According to the last reported balance sheet, Hoylu had liabilities of kr41.3m due within 12 months, and liabilities of kr95.0k due beyond 12 months. Offsetting these obligations, it had cash of kr4.29m as well as receivables valued at kr9.74m due within 12 months. So its liabilities total kr27.4m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Hoylu is worth kr109.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hoylu's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Hoylu wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to kr33m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Hoylu produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr50m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr51m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 6 warning signs we've spotted with Hoylu (including 2 which make us uncomfortable) .
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.