Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies SpectrumOne AB (published) (STO:SPEONE) uses debt. But should shareholders worry about its use of debt?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest review for SpectrumOne
What is SpectrumOne’s debt?
You can click on the graph below for historical figures, but it shows that as of June 2022, SpectrumOne had 47.1m kr in debt, an increase from 10.1m kr, year on year. On the other hand, he has 6.48 million kr in cash, resulting in a net debt of around 40.6 million kr.
How healthy is SpectrumOne’s balance sheet?
We can see from the most recent balance sheet that SpectrumOne had liabilities of 56.5 million kr due within one year, and liabilities of 10.7 million kr due beyond. In return, he had 6.48 million kr in cash and 13.0 million kr in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 47.7 million kr.
Of course, SpectrumOne has a market cap of 284.4 million kr, so those liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. When analyzing debt levels, the balance sheet is the obvious starting point. But it is SpectrumOne’s earnings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Last year, SpectrumOne was not profitable in terms of EBIT, but managed to increase its turnover by 115%, to 84 million kr. There is therefore no doubt that shareholders encourage growth
While we can certainly appreciate SpectrumOne’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Its EBIT loss was a whopping kr59m. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost 20 million kr of negative free cash flow in the last twelve months. So in short it’s a really risky title. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To do this, you need to find out about the 4 warning signs we spotted some with SpectrumOne (including 2 that are significant).
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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