Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Slottsviken Fastighetsaktiebolag (publ) (NGM: SLOTT B) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Slottsviken Fastighetsaktiebolag
What is Slottsviken Fastighetsaktiebolag’s net debt?
The graph below, which you can click for more details, shows that Slottsviken Fastighetsaktiebolag had SEK 26.3 million in debt as of June 2021; about the same as the year before. However, because he has a cash reserve of Kroner 1.49 million, his net debt is less, at around Kroner 24.8 million.
How strong is Slottsviken Fastighetsaktiebolag’s balance sheet?
According to the latest published balance sheet, Slottsviken Fastighetsaktiebolag had liabilities of KKr 8.93 million due within 12 months and KKr 38.0 million liabilities due beyond 12 months. In compensation for these obligations, it had cash of Kroner 1.49 million as well as receivables valued at Kroner 2.01 million within 12 months. It therefore has liabilities totaling SEK 43.4 million more than its combined cash and short-term receivables.
When you consider that this deficit exceeds the market cap by 40.8 million crowns, you might well be inclined to take a close look at the balance sheet. Hypothetically, an extremely large dilution would be necessary if the company was forced to repay its debts by raising capital at the current share price. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the profits of Slottsviken Fastighetsaktiebolag that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Over 12 months, Slottsviken Fastighetsaktiebolag recorded a loss in EBIT and saw its turnover fall to 6.4 million crowns, a decrease of 15%. We would much prefer to see the growth.
Slottsviken Fastighetsaktiebolag’s turnover not only declined over the past twelve months, but it also produced negative profit before interest and taxes (EBIT). To be precise, the EBIT loss amounted to SEK 1.3 million. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. It is fair to say that the loss of 1.2 million crowns did not encourage us either; we would like to see a profit. In the meantime, we consider the title to be risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Slottsviken Fastighetsaktiebolag has 4 warning signs (and 3 that are potentially serious) we think you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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