Some say 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.' 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. As with many other companies SeaTwirl AB (publ) (STO:STW) makes use of debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is SeaTwirl's Debt?
As you can see below, SeaTwirl had kr849.9k of debt, at May 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have kr3.04m in cash offsetting this, leading to net cash of kr2.19m.
How Strong Is SeaTwirl's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SeaTwirl had liabilities of kr1.31m due within 12 months and liabilities of kr849.9k due beyond that. On the other hand, it had cash of kr3.04m and kr195.8k worth of receivables due within a year. So it can boast kr1.08m more liquid assets than total liabilities.
This state of affairs indicates that SeaTwirl's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr284.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that SeaTwirl has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SeaTwirl will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, SeaTwirl saw its revenue drop to kr2.4m, which is a fall of 5.5%. That's not what we would hope to see.
So How Risky Is SeaTwirl?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year SeaTwirl had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through kr9.2m of cash and made a loss of kr5.2m. Given it only has net cash of kr3.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 SeaTwirl's profit, revenue, and operating cashflow have changed over the last few years.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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