Is Waystream Holding (STO:WAYS) A Risky Investment?

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. As with many other companies Waystream Holding AB (publ) (STO:WAYS) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Waystream Holding

How Much Debt Does Waystream Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Waystream Holding had kr17.3m of debt, an increase on kr14.0m, over one year. However, it also had kr10.8m in cash, and so its net debt is kr6.48m.

How Healthy Is Waystream Holding's Balance Sheet?

We can see from the most recent balance sheet that Waystream Holding had liabilities of kr50.7m falling due within a year, and liabilities of kr12.3m due beyond that. Offsetting these obligations, it had cash of kr10.8m as well as receivables valued at kr23.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr28.6m.

This deficit isn't so bad because Waystream Holding is worth kr128.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Waystream Holding 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 Waystream Holding had a loss before interest and tax, and actually shrunk its revenue by 16%, to kr125m. That's not what we would hope to see.

Caveat Emptor

Not only did Waystream Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at kr3.4m. 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. We would feel better if it turned its trailing twelve month loss of kr3.9m into a profit. So to be blunt we do think it is 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. To that end, you should be aware of the 2 warning signs we've spotted with Waystream Holding .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.