Is Confidence International AB (publ.) (STO:CONF) A Risky Investment?

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.' 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 note that Confidence International AB (publ.) (STO:CONF) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Confidence International AB (publ.)

How Much Debt Does Confidence International AB (publ.) Carry?

As you can see below, at the end of March 2021, Confidence International AB (publ.) had kr25.5m of debt, up from kr22.3m a year ago. Click the image for more detail. On the flip side, it has kr12.8m in cash leading to net debt of about kr12.6m.

How Strong Is Confidence International AB (publ.)'s Balance Sheet?

We can see from the most recent balance sheet that Confidence International AB (publ.) had liabilities of kr47.5m falling due within a year, and liabilities of kr11.1m due beyond that. Offsetting these obligations, it had cash of kr12.8m as well as receivables valued at kr27.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr18.7m.

This deficit isn't so bad because Confidence International AB (publ.) is worth kr77.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Confidence International AB (publ.) will need earnings to service that debt. 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 Confidence International AB (publ.) wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to kr105m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Confidence International AB (publ.) produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping kr11m. 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. However, it doesn't help that it burned through kr4.7m of cash over the last year. 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 Confidence International AB (publ.) (including 3 which are a bit unpleasant) .

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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