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. 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 Modern Ekonomi Sverige Holding AB (publ) (STO:ME) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for Modern Ekonomi Sverige Holding
How Much Debt Does Modern Ekonomi Sverige Holding Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Modern Ekonomi Sverige Holding had kr17.4m of debt, an increase on kr14.5m, over one year. And it doesn’t have much cash, so its net debt is about the same.
How Healthy Is Modern Ekonomi Sverige Holding’s Balance Sheet?
We can see from the most recent balance sheet that Modern Ekonomi Sverige Holding had liabilities of kr30.1m falling due within a year, and liabilities of kr16.6m due beyond that. Offsetting this, it had kr197.0k in cash and kr37.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr8.80m.
This deficit isn’t so bad because Modern Ekonomi Sverige Holding is worth kr42.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Modern Ekonomi Sverige Holding’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Modern Ekonomi Sverige Holding’s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months Modern Ekonomi Sverige Holding produced an earnings before interest and tax (EBIT) loss. Indeed, it lost kr1.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through kr4.2m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Modern Ekonomi Sverige Holding I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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