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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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 Botnia Exploration Holding AB (publ) (STO:BOTX) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Botnia Exploration Holding
What Is Botnia Exploration Holding's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Botnia Exploration Holding had kr4.58m of debt, an increase on kr4.24m, over one year. But it also has kr8.68m in cash to offset that, meaning it has kr4.10m net cash.
How Healthy Is Botnia Exploration Holding's Balance Sheet?
According to the last reported balance sheet, Botnia Exploration Holding had liabilities of kr636.0k due within 12 months, and liabilities of kr4.81m due beyond 12 months. Offsetting this, it had kr8.68m in cash and kr179.0k in receivables that were due within 12 months. So it can boast kr3.42m more liquid assets than total liabilities.
This surplus suggests that Botnia Exploration Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Botnia Exploration Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Botnia Exploration 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 Botnia Exploration Holding had negative earnings before interest and tax, and actually shrunk its revenue by 72%, to kr2.5m. That makes us nervous, to say the least.