Does PowerCell Sweden (STO: PCELL) use debts in a risky way?
Some say that 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 want to look at its use of debt, because debt overload can lead to ruin. We note that PowerCell Sweden AB (publ) (STO: PCELL) has liabilities on its balance sheet. But is this debt a concern for shareholders?
What is the risk of debt?
Debt is a tool to help companies grow, but if a company is unable to pay off its lenders, then it is at their mercy. If things go really badly, lenders can take control of the business. A more common (but still expensive) situation, however, is that a company must dilute shareholders to a cheap share price simply to get the debt under control. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in high-yield growth. 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 fault?
The diagram below, which you can click on for more details, shows that PowerCell Sweden had SEK 30.5 million in debt in March 2022; about the same as the year before. But on the other hand, it also has SEK 290.3 million in cash, which leads to a net cash of SEK 259.7 million.
How healthy is PowerCell Sweden’s balance sheet?
We can see from the latest balance sheet that PowerCell Sweden had liabilities of SEK 74.6 million that fell due within one year and liabilities of SEK 59.4 million in addition. Against these commitments, it had cash of SEK 290.3 million and receivables valued at SEK 72.5 million due within 12 months. So it can boast of SEK 228.8 million more liquid assets than total liabilities.
This short-term liquidity is a sign that PowerCell Sweden would probably be able to pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PowerCell Sweden has more cash than debt is undoubtedly a good indication that you can handle your debt safely. There is no doubt that we learn the most about debt from the balance sheet. But in the end, the future profitability of the business will determine whether PowerCell Sweden can strengthen its balance sheet over time. So if you are focused on the future, you can check this out free report showing analysts’ earnings forecasts.
For 12 months, PowerCell Sweden reported sales of SEK 160 million, which is a profit of 50%, even though it did not report any profit before interest and tax. The shareholders probably keep their fingers crossed that it can grow into a profit.
So how risky is PowerCell Sweden?
By nature, companies that lose money are more risky than those with a long history of profitability. And the fact is that in the last twelve months, PowerCell Sweden has lost money on the line profit before interest and tax (EBIT). During that time, it burned through SEK 113 million in cash and made a loss of SEK 83 million. With only SEK 259.7 million on the balance sheet, it seems that it will soon need to raise capital again. With very solid revenue growth over the past year, PowerCell Sweden can be on the road to profitability. By investing before these gains, shareholders take more risk in hopes of greater rewards. When analyzing debt levels, the balance sheet is the obvious place to start. But in the end, every business can contain off-balance sheet risks. These risks can be difficult to detect. All companies have them, and we have discovered them 2 warning signs for PowerCell Sweden 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.
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This article by Simply Wall St is general in nature. 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 any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the shares mentioned.