Precise Biometrics (STO:PREC) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Precise Biometrics AB (publ) (STO:PREC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Precise Biometrics

What Is Precise Biometrics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Precise Biometrics had kr17.4m of debt, an increase on none, over one year. But on the other hand it also has kr47.5m in cash, leading to a kr30.1m net cash position.

How Strong Is Precise Biometrics' Balance Sheet?

The latest balance sheet data shows that Precise Biometrics had liabilities of kr35.9m due within a year, and liabilities of kr17.5m falling due after that. Offsetting these obligations, it had cash of kr47.5m as well as receivables valued at kr22.7m due within 12 months. So it can boast kr16.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Precise Biometrics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Precise Biometrics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Precise Biometrics'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 Precise Biometrics had a loss before interest and tax, and actually shrunk its revenue by 18%, to kr75m. We would much prefer see growth.

So How Risky Is Precise Biometrics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Precise Biometrics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through kr26m of cash and made a loss of kr26m. However, it has net cash of kr30.1m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Precise Biometrics (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.