The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Dome Energy AB (publ) (STO:DOME) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Dome Energy
How Much Debt Does Dome Energy Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Dome Energy had debt of kr267.5m, up from kr245.6m in one year. However, because it has a cash reserve of kr5.38m, its net debt is less, at about kr262.1m.
How Healthy Is Dome Energy's Balance Sheet?
The latest balance sheet data shows that Dome Energy had liabilities of kr300.5m due within a year, and liabilities of kr71.5m falling due after that. Offsetting these obligations, it had cash of kr5.38m as well as receivables valued at kr12.8m due within 12 months. So it has liabilities totalling kr353.8m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the kr77.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt At the end of the day, Dome Energy would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dome Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.