David Iben put it well when he said: ‘Volatility is not a risk we care about. What we care about is avoiding permanent loss of capital. ‘When we think about how risky a business is, we always like to look at its use of debt, because debt overload can lead to destruction. Important, PowerCell Sweden AB (publ) (STO: PCELL) bears debt. But is this debt a problem for shareholders?
Why does debt pose a risk?
Debt is a tool to help companies grow, but if a company can not pay off its lenders, then it exists at their mercy. In the end, if the company can not fulfill its legal obligations to repay debts, the shareholders can get away with nothing. A more common (but still costly) event, however, is where a company must issue shares at bargain prices, permanent dilution of shareholders, just to strengthen its balance sheet. That being said, the most common situation where a company handles its debt is reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels together.
See our latest analysis for PowerCell Sweden
What is PowerCell Sweden’s net debt?
As you can see below, PowerCell Sweden had SEK 62.9 million in debt in June 2021, a decrease from SEK 67.9 million a year earlier. But it also has SEK 399.5 million in cash to compensate for it, which means that it has SEK 336.6 million in net cash.
A look at PowerCell Sweden’s shoulders
By zooming in on the latest balance sheet data, we can see that PowerCell Sweden had liabilities of SEK 77.6 million within 12 months and liabilities of SEK 62.9 million in addition. Against this obligation, it had cash of SEK 399.5 million and receivables worth SEK 35.6 million within 12 months. So it boasts SEK 294.6 million more cash than total liabilities.
This surplus indicates that PowerCell Sweden has a conservative balance sheet and can probably eliminate its debt without major difficulties. Simply put, the fact that PowerCell Sweden has more cash than debt is undoubtedly a good indication that it can handle its debt safely. There is no doubt that we learn the most about debt from the balance sheet. But it is future results, more than anything else, that will determine PowerCell Sweden’s ability to maintain a healthy balance sheet in the future. So if you want to see what the pros think, you may find this free report on analysts’ earnings forecasts interesting.
For 12 months, PowerCell Sweden reported sales of SEK 113 million, which is a profit of 24%, even though it did not report any results before interest and tax. The shareholders probably keep their fingers crossed that it can grow into a profit.
So how risky is PowerCell Sweden?
While PowerCell Sweden lost money on a profit before interest and tax (EBIT), it actually generated a positive free cash flow of SEK 16 million. So we take it at face value and given the net cash position, we do not think the stock is too risky in the short term. We think that sales growth of 24% is a good sign. There is no doubt that rapid growth on the top line can cure all kinds of diseases, for one share. The balance sheet is clearly the area to focus on when analyzing debt. But not all investment risk is in the balance sheet – far from it. Be aware that PowerCell Sweden shows 1 warning sign in our investment analysis , you should know about …
Of course, if you are the type of investor who prefers to buy debt-free stocks, do not hesitate to discover our exclusive list of net growth stocks today.
This article by Simply Wall St is general. We provide comments based on historical data and analyst forecasts only using an impartial method and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We strive to provide you with a long-term focused analysis driven by basic data. Please note that our analysis may not affect the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the aforementioned shares.
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