Stock Analysis

SpectrumOne (STO:SPEONE) Is Making Moderate Use Of Debt

OM:SPEONE
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SpectrumOne AB (publ) (STO:SPEONE) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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.

View our latest analysis for SpectrumOne

What Is SpectrumOne's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 SpectrumOne had kr47.1m of debt, an increase on kr10.1m, over one year. On the flip side, it has kr6.48m in cash leading to net debt of about kr40.6m.

debt-equity-history-analysis
OM:SPEONE Debt to Equity History August 22nd 2022

How Healthy Is SpectrumOne's Balance Sheet?

We can see from the most recent balance sheet that SpectrumOne had liabilities of kr56.5m falling due within a year, and liabilities of kr10.7m due beyond that. Offsetting this, it had kr6.48m in cash and kr13.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr47.7m.

Of course, SpectrumOne has a market capitalization of kr284.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is SpectrumOne'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.

In the last year SpectrumOne wasn't profitable at an EBIT level, but managed to grow its revenue by 115%, to kr84m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate SpectrumOne's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping kr59m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr20m 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 4 warning signs we've spotted with SpectrumOne (including 2 which are significant) .

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.