Warren Buffett famously said, '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. We can see that Sanistål A/S (CPH:SANI) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Sanistål's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Sanistål had kr.425.8m of debt, an increase on kr.330.5m, over one year. However, because it has a cash reserve of kr.17.6m, its net debt is less, at about kr.408.2m.
How Healthy Is Sanistål's Balance Sheet?
According to the last reported balance sheet, Sanistål had liabilities of kr.1.09b due within 12 months, and liabilities of kr.231.8m due beyond 12 months. Offsetting this, it had kr.17.6m in cash and kr.596.9m in receivables that were due within 12 months. So it has liabilities totalling kr.702.3m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of kr.587.3m, we think shareholders really should watch Sanistål's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Sanistål had a loss before interest and tax, and actually shrunk its revenue by 26%, to kr.3.2b. That makes us nervous, to say the least.
While Sanistål's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr.83m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of kr.185m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Sanistål (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. 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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