Here's Why Garo Aktiebolag (STO:GARO) Is Weighed Down By Its Debt Load

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Garo Aktiebolag (publ) (STO:GARO) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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 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, 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.

What Is Garo Aktiebolag's Debt?

As you can see below, at the end of December 2024, Garo Aktiebolag had kr235.5m of debt, up from kr199.8m a year ago. Click the image for more detail. However, it does have kr16.5m in cash offsetting this, leading to net debt of about kr219.0m.

How Healthy Is Garo Aktiebolag's Balance Sheet?

We can see from the most recent balance sheet that Garo Aktiebolag had liabilities of kr429.7m falling due within a year, and liabilities of kr126.9m due beyond that. Offsetting this, it had kr16.5m in cash and kr282.7m in receivables that were due within 12 months. So it has liabilities totalling kr257.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Garo Aktiebolag has a market capitalization of kr1.08b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

See our latest analysis for Garo Aktiebolag

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.0065 times and a disturbingly high net debt to EBITDA ratio of 13.0 hit our confidence in Garo Aktiebolag like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Garo Aktiebolag's EBIT was down 100% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Garo Aktiebolag can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Garo Aktiebolag burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Garo Aktiebolag's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to handle its total liabilities isn't such a worry. We're quite clear that we consider Garo Aktiebolag to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. Given our concerns about Garo Aktiebolag's debt levels, it seems only prudent to check if insiders have been ditching the stock.

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.

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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.