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. Importantly, SSM Holding AB (publ) (STO:SSM) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for SSM Holding
What Is SSM Holding's Net Debt?
As you can see below, SSM Holding had kr500.4m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of kr121.6m, its net debt is less, at about kr378.8m.
A Look At SSM Holding's Liabilities
We can see from the most recent balance sheet that SSM Holding had liabilities of kr525.8m falling due within a year, and liabilities of kr43.6m due beyond that. On the other hand, it had cash of kr121.6m and kr78.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr369.3m.
When you consider that this deficiency exceeds the company's kr313.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SSM 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 SSM Holding had negative earnings before interest and tax, and actually shrunk its revenue by 86%, to kr141m. That makes us nervous, to say the least.