Stock Analysis

Does Sanistål (CPH:SANI) Have A Healthy Balance Sheet?

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Sanistål A/S (CPH:SANI) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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How Much Debt Does Sanistål Carry?

You can click the graphic below for the historical numbers, but it shows that Sanistål had kr.316.9m of debt in December 2020, down from kr.442.0m, one year before. On the flip side, it has kr.28.3m in cash leading to net debt of about kr.288.6m.

CPSE:SANI Debt to Equity History May 11th 2021

How Healthy Is Sanistål's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sanistål had liabilities of kr.990.8m due within 12 months and liabilities of kr.211.7m due beyond that. On the other hand, it had cash of kr.28.3m and kr.523.7m worth of receivables due within a year. So its liabilities total kr.650.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of kr.848.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sanistål's earnings that will influence how the balance sheet holds up in the future. 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, Sanistål made a loss at the EBIT level, and saw its revenue drop to kr.3.3b, which is a fall of 10%. That's not what we would hope to see.

Caveat Emptor

Not only did Sanistål's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at kr.13m. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of kr.21m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sanistål you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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