Is ZignSec (STO:ZIGN) Using Too Much 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.' 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. We can see that ZignSec AB (publ) (STO:ZIGN) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ZignSec

What Is ZignSec's Net Debt?

As you can see below, at the end of December 2022, ZignSec had kr21.5m of debt, up from kr1.65m a year ago. Click the image for more detail. But on the other hand it also has kr26.2m in cash, leading to a kr4.70m net cash position.

How Healthy Is ZignSec's Balance Sheet?

We can see from the most recent balance sheet that ZignSec had liabilities of kr44.2m falling due within a year, and liabilities of kr22.4m due beyond that. On the other hand, it had cash of kr26.2m and kr16.5m worth of receivables due within a year. So its liabilities total kr23.9m more than the combination of its cash and short-term receivables.

ZignSec has a market capitalization of kr100.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, ZignSec boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ZignSec will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ZignSec reported revenue of kr90m, which is a gain of 70%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ZignSec?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ZignSec lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr28m and booked a kr102m accounting loss. But at least it has kr4.70m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, ZignSec may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with ZignSec (including 4 which are a bit unpleasant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.