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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. As with many other companies ProstaLund AB (publ) (STO:PLUN) makes use of debt. But the real question is whether this debt is making the company risky.
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for ProstaLund
What Is ProstaLund's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 ProstaLund had debt of kr2.72m, up from none in one year. However, its balance sheet shows it holds kr3.09m in cash, so it actually has kr372.0k net cash.
How Strong Is ProstaLund's Balance Sheet?
According to the last reported balance sheet, ProstaLund had liabilities of kr6.16m due within 12 months, and liabilities of kr800.0k due beyond 12 months. On the other hand, it had cash of kr3.09m and kr632.0k worth of receivables due within a year. So it has liabilities totalling kr3.24m more than its cash and near-term receivables, combined.
Since publicly traded ProstaLund shares are worth a total of kr39.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ProstaLund boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is ProstaLund'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.
Over 12 months, ProstaLund reported revenue of kr14m, which is a gain of 14%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.