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, Cellink AB (publ) (STO:CLNK B) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Cellink Carry?
You can click the graphic below for the historical numbers, but it shows that as of May 2019 Cellink had kr2.30m of debt, an increase on kr600.0k, over one year. But it also has kr80.3m in cash to offset that, meaning it has kr78.0m net cash.
How Healthy Is Cellink's Balance Sheet?
According to the last reported balance sheet, Cellink had liabilities of kr22.5m due within 12 months, and liabilities of kr1.27m due beyond 12 months. On the other hand, it had cash of kr80.3m and kr33.9m worth of receivables due within a year. So it actually has kr90.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Cellink could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cellink has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that Cellink has increased its EBIT by 8.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cellink will need earnings to service that debt. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cellink has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Cellink burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Cellink has kr78m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 8.8% over the last year. So we are not troubled with Cellink's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Cellink insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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