Charlie Munger-backed external fund manager of Berkshire Hathaway, Li Lu, doesn’t give a damn when he says, “The biggest investment risk is not price volatility, but if you suffer a permanent loss of capital.” When we think about how risky a company is, we always like to look at its debt utilization, as debt overload can lead to ruin. As with many other companies Paxman AB (published) (STO: PAX) makes use of debt. But is this debt a concern for shareholders?
What risk does debt entail?
Debt is a tool to help companies grow, but if a company is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” in which failed businesses are mercilessly liquidated by their bankers. However, a more common (but still expensive) situation is where a company has to dilute shareholders at an affordable share price simply to keep debt in check. Of course, many companies use debt to finance growth, with no negative consequences. The first step when considering a company’s debt levels is to consider liquidity and debt together.
Check out our latest analysis for Paxman
What is Paxman’s Net Debt?
You can click the graph below for the historical numbers, but it shows Paxman was in debt of kr17.2 million as of December 2021, down from kr48.2 million a year earlier. However, his balance sheet shows that he holds kr72.3 million in cash, so he actually has kr55.1 million in net cash.
How healthy is Paxman’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Paxman had liabilities for 34.8 million kr due within 12 months and liabilities for 5.83 million kr due beyond. To offset these obligations, he had cash of kr72.3 million and credits worth kr17.3 million due within 12 months. So it can boast more than kr49.0m liquid assets compared to total liabilities.
This surplus suggests that Paxman has a conservative balance sheet and could likely eliminate his debt without much difficulty. Simply put, the fact that Paxman has more cash than debt is probably a good indication that he can manage his debt safely. There is no doubt that we learn more about debt from the budget. But it is Paxman’s earnings that will affect the holding of the balance sheet in the future. So, if you’d like to find out more about his earnings, it might be worth checking out this chart of his long-term earnings trend.
Paxman has not been profitable in EBIT for the past year, but managed to increase its revenues by 26%, up to kr105m. With any luck the company will be able to grow to profitability.
So how risky is Paxman?
We have no doubt that loss-making companies are, in general, riskier than profitable ones. And we note that Paxman has made a profit before loss of interest and taxes (EBIT) over the past year. In fact, during that time he burned kr4.8m of cash and made a loss of kr13m. With only 55.1 million kr in the budget, it would appear that capital will need to be raised again soon. With very solid revenue growth over the past year, Paxman could be on track to profitability. Pre-profit companies are often risky, but they can also offer great benefits. There is no doubt that we learn more about debt from the budget. But ultimately, any business can contain risks that exist outside the balance sheet. These risks can be difficult to spot. Every company has them and we have identified them 4 warning signs for Paxman (1 of which cannot be ignored!) you should know.
If you are interested in investing in companies that can increase profits without the burden of debt, check this out free list of growing companies that have net liquidity on their balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell stock and does not take into account your goals or financial situation. Our goal is to provide you with a focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no position in any of the stocks mentioned.