Is SpectrumOne (STO:SPEONE) Using Too Much Debt?

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 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. We note that SpectrumOne AB (publ) (STO:SPEONE) does have debt on its balance sheet. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SpectrumOne

What Is SpectrumOne's Debt?

The image below, which you can click on for greater detail, shows that SpectrumOne had debt of kr52.1m at the end of March 2023, a reduction from kr66.4m over a year. However, it does have kr3.65m in cash offsetting this, leading to net debt of about kr48.5m.

How Healthy Is SpectrumOne's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SpectrumOne had liabilities of kr60.2m due within 12 months and liabilities of kr7.21m due beyond that. Offsetting this, it had kr3.65m in cash and kr4.68m in receivables that were due within 12 months. So it has liabilities totalling kr59.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because SpectrumOne is worth kr126.7m, 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 SpectrumOne's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SpectrumOne made a loss at the EBIT level, and saw its revenue drop to kr66m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did SpectrumOne's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping kr39m. 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 kr14m 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. Case in point: We've spotted 4 warning signs for SpectrumOne you should be aware of, and 2 of them are a bit concerning.

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.