Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Consilium AB (publ) (STO:CONS B) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Consilium
How Much Debt Does Consilium Carry?
The image below, which you can click on for greater detail, shows that at December 2019 Consilium had debt of kr912.0m, up from kr850.6m in one year. And it doesn't have much cash, so its net debt is about the same.
A Look At Consilium's Liabilities
The latest balance sheet data shows that Consilium had liabilities of kr1.58b due within a year, and liabilities of kr79.5m falling due after that. Offsetting these obligations, it had cash of kr7.30m as well as receivables valued at kr108.4m due within 12 months. So it has liabilities totalling kr1.54b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of kr1.35b, we think shareholders really should watch Consilium'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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Consilium's ability to maintain a healthy balance sheet going forward. 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 Consilium had negative earnings before interest and tax, and actually shrunk its revenue by 23%, to kr284m. That makes us nervous, to say the least.
Caveat Emptor
While Consilium's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr178m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of kr332m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Consilium has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.
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. Thank you for reading.