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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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Aino Health AB (publ) (STO:AINO) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
Check out our latest analysis for Aino Health
How Much Debt Does Aino Health Carry?
The image below, which you can click on for greater detail, shows that Aino Health had debt of kr371.0k at the end of June 2019, a reduction from kr733.0k over a year. But on the other hand it also has kr3.88m in cash, leading to a kr3.51m net cash position.
How Healthy Is Aino Health's Balance Sheet?
According to the last reported balance sheet, Aino Health had liabilities of kr8.60m due within 12 months, and liabilities of kr371.0k due beyond 12 months. Offsetting this, it had kr3.88m in cash and kr3.60m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr1.49m.
Since publicly traded Aino Health shares are worth a total of kr56.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Aino Health also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aino Health can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.