Does Invisio (STO:IVSO) Have A Healthy Balance Sheet?

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.' 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 Invisio AB (publ) (STO:IVSO) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Invisio

How Much Debt Does Invisio Carry?

As you can see below, at the end of December 2021, Invisio had kr85.0m of debt, up from none a year ago. Click the image for more detail. But it also has kr134.8m in cash to offset that, meaning it has kr49.8m net cash.

How Healthy Is Invisio's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Invisio had liabilities of kr117.8m due within 12 months and liabilities of kr154.7m due beyond that. On the other hand, it had cash of kr134.8m and kr144.9m worth of receivables due within a year. So it can boast kr7.20m more liquid assets than total liabilities.

Having regard to Invisio's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr6.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Invisio boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Invisio's load is not too heavy, because its EBIT was down 74% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Invisio can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Invisio has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Invisio actually produced more free cash flow than EBIT. 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 investigate a company's debt, in this case Invisio has kr49.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in kr85m. So we don't have any problem with Invisio's use of debt. When analysing 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 2 warning signs for Invisio 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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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.