Howard Marks put it nicely when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.” It is only natural to consider a company’s balance sheet when examining how risky it is, as debt is often involved when a company collapses. As with many other companies PowerCell Sweden AB (publ) (STO: PCELL) makes use of guilt. But the more important question is: how much risk does that debt create?

When is debt dangerous?

Debt helps a company until the company has trouble paying it off, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. A more common (but still expensive) situation, however, is that a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is that a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a company is using is to look at its cash and debt together.

See our latest analysis for PowerCell Sweden

How much debt does PowerCell Sweden have?

You can click on the graphic below for the historical numbers, but it shows that PowerCell Sweden had SEK 30.5 million in debt in September 2022, down from SEK 61.2 million a year earlier. However, its balance sheet shows that it has SEK 239.4 million in cash, so it actually has SEK 208.8 million net.

A look at PowerCell Sweden’s debts

The latest balance sheet shows that PowerCell Sweden had debts of SEK 84.9 million due within one year, and debts of SEK 56.2 million due after that. On the other hand, it had cash of SEK 239.4 million and receivables worth SEK 65.2 million due within a year. So it actually has SEK 163.5 million More liquid assets than total liabilities.

This short-term liquidity is a sign that PowerCell Sweden could likely 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 it can manage its debt in a safe manner. There is no doubt that we learn most about debt from the balance sheet. But ultimately, the future profitability of the business will determine whether PowerCell Sweden can strengthen its balance sheet over time. So if you want to see what the pros think, you might find it this free analyst earnings forecast report to be interesting.

During 12 months, PowerCell Sweden reported a turnover of SEK 200 million, which is a profit of 42%, although it reported no profit before interest and tax. With any luck, the company will be able to grow to profitability.

So how risky is PowerCell Sweden?

We have no doubt that loss-making companies are generally more risky than profitable. And in the last year, PowerCell Sweden had an earnings before interest and tax (EBIT) loss, frankly. At the time, it burned through SEK 121 million in cash and made a loss of SEK 85 million. Given that it only has a net cash of SEK 208.8 million, the company may need to raise more capital if it does not break even soon. PowerCell Sweden’s revenue growth has shone brightly over the past year, so it may well be able to turn a profit in due course. Pre-profit businesses are often fraught with risk, but they can also offer great rewards. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risk is on the balance sheet – far from it. For example, we have discovered 1 warning sign for PowerCell Sweden which you should be aware of before investing here.

At the end of the day, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of profit growth). Its 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 by 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 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 fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.