We Think Realfiction Holding (STO:REALFI) Has A Fair Chunk Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Realfiction Holding AB (publ) (STO:REALFI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

What Is Realfiction Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Realfiction Holding had kr21.3m of debt, an increase on kr3.34m, over one year. However, because it has a cash reserve of kr14.3m, its net debt is less, at about kr6.95m.

How Strong Is Realfiction Holding's Balance Sheet?

We can see from the most recent balance sheet that Realfiction Holding had liabilities of kr27.9m falling due within a year, and liabilities of kr13.0m due beyond that. On the other hand, it had cash of kr14.3m and kr12.3m worth of receivables due within a year. So its liabilities total kr14.3m more than the combination of its cash and short-term receivables.

Since publicly traded Realfiction Holding shares are worth a total of kr272.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Realfiction Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Realfiction Holding

In the last year Realfiction Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to kr26m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Realfiction Holding still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr16m. 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 kr18m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 4 warning signs with Realfiction Holding (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.