Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Dignitana AB (publ.) (STO:DIGN) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Dignitana AB (publ.) Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Dignitana AB (publ.) had kr6.36m of debt, an increase on kr4.62m, over one year. However, it does have kr11.5m in cash offsetting this, leading to net cash of kr5.11m.
A Look At Dignitana AB (publ.)'s Liabilities
The latest balance sheet data shows that Dignitana AB (publ.) had liabilities of kr19.3m due within a year, and liabilities of kr594.6k falling due after that. Offsetting this, it had kr11.5m in cash and kr5.34m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr3.11m.
Having regard to Dignitana AB (publ.)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr452.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Dignitana AB (publ.) also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Dignitana AB (publ.)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Dignitana AB (publ.) wasn't profitable at an EBIT level, but managed to grow its revenue by58%, to kr41m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Dignitana AB (publ.)?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Dignitana AB (publ.) had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of kr64m and booked a kr24m accounting loss. Given it only has net cash of kr5.11m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Dignitana AB (publ.) may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Dignitana AB (publ.)'s profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.