These 4 Measures Indicate That Inission (STO:INISS B) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Inission AB (publ) (STO:INISS B) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Inission

What Is Inission's Net Debt?

The image below, which you can click on for greater detail, shows that Inission had debt of kr43.7m at the end of December 2020, a reduction from kr98.5m over a year. But it also has kr44.3m in cash to offset that, meaning it has kr614.0k net cash.

How Healthy Is Inission's Balance Sheet?

The latest balance sheet data shows that Inission had liabilities of kr184.9m due within a year, and liabilities of kr68.1m falling due after that. Offsetting these obligations, it had cash of kr44.3m as well as receivables valued at kr156.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr52.7m.

Given Inission has a market capitalization of kr602.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Inission also has more cash than debt, so we're pretty confident it can manage its debt safely.

Unfortunately, Inission's EBIT flopped 13% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Inission 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Inission may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Inission actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Inission has kr614.0k in net cash. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in kr57m. So we are not troubled with Inission's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Inission that you should be aware of.

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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