Would SpectrumOne (STO:SPEONE) Be Better Off With Less Debt?

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. Importantly, SpectrumOne AB (publ) (STO:SPEONE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SpectrumOne

How Much Debt Does SpectrumOne Carry?

The image below, which you can click on for greater detail, shows that at September 2022 SpectrumOne had debt of kr57.8m, up from kr10.3m in one year. However, it also had kr9.62m in cash, and so its net debt is kr48.1m.

How Healthy Is SpectrumOne's Balance Sheet?

We can see from the most recent balance sheet that SpectrumOne had liabilities of kr68.2m falling due within a year, and liabilities of kr9.05m due beyond that. Offsetting these obligations, it had cash of kr9.62m as well as receivables valued at kr11.6m due within 12 months. So it has liabilities totalling kr56.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since SpectrumOne has a market capitalization of kr141.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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 72%, to kr84m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate SpectrumOne's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable kr60m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr27m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 5 warning signs with SpectrumOne (at least 2 which are concerning) , 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.