Is DistIT (STO:DIST) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, DistIT AB (publ) (STO:DIST) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DistIT

What Is DistIT's Debt?

As you can see below, DistIT had kr353.0m of debt at June 2023, down from kr389.1m a year prior. However, it also had kr25.3m in cash, and so its net debt is kr327.7m.

How Strong Is DistIT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DistIT had liabilities of kr513.2m due within 12 months and liabilities of kr423.2m due beyond that. On the other hand, it had cash of kr25.3m and kr379.9m worth of receivables due within a year. So its liabilities total kr531.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr144.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, DistIT would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DistIT can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year DistIT had a loss before interest and tax, and actually shrunk its revenue by 7.0%, to kr2.5b. That's not what we would hope to see.

Caveat Emptor

Importantly, DistIT had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr8.2m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized kr45m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. We've identified 4 warning signs with DistIT (at least 3 which make us uncomfortable) , and understanding them should be part of your investment process.

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. 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.