The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sivers IMA Holding AB (publ) (STO:SIVE) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Sivers IMA Holding's Debt?
The image below, which you can click on for greater detail, shows that at December 2019 Sivers IMA Holding had debt of kr39.5m, up from kr37.7m in one year. However, it does have kr52.2m in cash offsetting this, leading to net cash of kr12.7m.
How Healthy Is Sivers IMA Holding's Balance Sheet?
We can see from the most recent balance sheet that Sivers IMA Holding had liabilities of kr107.6m falling due within a year, and liabilities of kr28.1m due beyond that. Offsetting these obligations, it had cash of kr52.2m as well as receivables valued at kr31.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr52.3m.
Since publicly traded Sivers IMA Holding shares are worth a total of kr1.07b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sivers IMA Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sivers IMA Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Sivers IMA Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to kr130m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Sivers IMA Holding?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sivers IMA Holding had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of kr95m and booked a kr76m accounting loss. With only kr12.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Sivers IMA Holding's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sivers IMA Holding is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.