Here’s Why Induct (OB:INDCT) Can Afford Some Debt

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.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Induct AS (OB:INDCT) does carry debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

View our latest analysis for Induct

What Is Induct’s Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Induct had debt of kr26.2m, up from kr16.5m in one year. However, it does have kr4.41m in cash offsetting this, leading to net debt of about kr21.8m.

OB:INDCT Debt to Equity History November 25th 2022

A Look At Induct’s Liabilities

The latest balance sheet data shows that Induct had liabilities of kr19.4m due within a year, and liabilities of kr33.1m falling due after that. Offsetting this, it had kr4.41m in cash and kr5.30m in receivables that were due within 12 months. So its liabilities total kr42.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Induct has a market capitalization of kr116.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Induct will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Induct reported revenue of kr19m, which is a gain of 53%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Induct still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr3.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of kr5.2m into a profit. So to be blunt we do think it’s risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 4 warning signs for Induct (1 shouldn’t be ignored) you should be aware of.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

Valuation is complex, but we’re helping make it simple.

Find out whether induction is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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