Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Sileon AB (publ) (STO:SILEON) makes use of debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Sileon
What Is Sileon's Net Debt?
As you can see below, Sileon had kr80.9m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr34.8m in cash offsetting this, leading to net debt of about kr46.1m.
A Look At Sileon's Liabilities
The latest balance sheet data shows that Sileon had liabilities of kr116.1m due within a year, and liabilities of kr49.2m falling due after that. Offsetting this, it had kr34.8m in cash and kr44.0m in receivables that were due within 12 months. So its liabilities total kr86.5m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of kr135.2m, so it does suggest shareholders should keep an eye on Sileon's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sileon 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 Sileon wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to kr76m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Sileon managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping kr31m. 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 kr42m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Sileon (at least 2 which can't be ignored) , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
