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. As with many other companies Confidence International AB (publ.) (STO:CONF) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Confidence International AB (publ.) Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Confidence International AB (publ.) had debt of kr33.3m, up from kr24.2m in one year. However, because it has a cash reserve of kr5.92m, its net debt is less, at about kr27.4m.
How Healthy Is Confidence International AB (publ.)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Confidence International AB (publ.) had liabilities of kr62.2m due within 12 months and liabilities of kr11.7m due beyond that. Offsetting these obligations, it had cash of kr5.92m as well as receivables valued at kr30.4m due within 12 months. So it has liabilities totalling kr37.6m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of kr36.1m, we think shareholders really should watch Confidence International AB (publ.)'s debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Confidence International AB (publ.)'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.
In the last year Confidence International AB (publ.) wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to kr100m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Confidence International AB (publ.) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr15m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr3.5m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Confidence International AB (publ.) (2 make us uncomfortable!) that you should be aware of before investing here.
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. 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.
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