Is Concejo (STO:CNCJO B) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Concejo AB (publ) (STO:CNCJO B) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Concejo

What Is Concejo's Debt?

As you can see below, at the end of September 2021, Concejo had kr405.3m of debt, up from kr6.20m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr984.8m in cash, so it actually has kr579.5m net cash.

How Healthy Is Concejo's Balance Sheet?

According to the last reported balance sheet, Concejo had liabilities of kr457.1m due within 12 months, and liabilities of kr204.5m due beyond 12 months. Offsetting these obligations, it had cash of kr984.8m as well as receivables valued at kr121.0m due within 12 months. So it can boast kr444.2m more liquid assets than total liabilities.

This surplus strongly suggests that Concejo has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Concejo has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Concejo 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 Concejo had a loss before interest and tax, and actually shrunk its revenue by 15%, to kr229m. We would much prefer see growth.

So How Risky Is Concejo?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Concejo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr58m of cash and made a loss of kr131m. With only kr579.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Concejo (1 can't be ignored!) that you should be aware of before investing here.

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.