Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Cell Impact AB (publ) (STO:CI B) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
See our latest analysis for Cell Impact
How Much Debt Does Cell Impact Carry?
The image below, which you can click on for greater detail, shows that Cell Impact had debt of kr1.40m at the end of June 2019, a reduction from kr1.70m over a year. But it also has kr44.9m in cash to offset that, meaning it has kr43.5m net cash.
How Healthy Is Cell Impact's Balance Sheet?
The latest balance sheet data shows that Cell Impact had liabilities of kr14.8m due within a year, and liabilities of kr1.30m falling due after that. On the other hand, it had cash of kr44.9m and kr7.50m worth of receivables due within a year. So it can boast kr36.3m more liquid assets than total liabilities.
It's good to see that Cell Impact has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Cell Impact has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cell Impact's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.