Is SaltX Technology Holding (STO:SALT B) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SaltX Technology Holding AB (publ) (STO:SALT B) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that SALT B is potentially overvalued!

How Much Debt Does SaltX Technology Holding Carry?

As you can see below, SaltX Technology Holding had kr27.1m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr23.7m in cash offsetting this, leading to net debt of about kr3.46m.

A Look At SaltX Technology Holding's Liabilities

We can see from the most recent balance sheet that SaltX Technology Holding had liabilities of kr12.6m falling due within a year, and liabilities of kr25.7m due beyond that. Offsetting this, it had kr23.7m in cash and kr2.97m in receivables that were due within 12 months. So its liabilities total kr11.7m more than the combination of its cash and short-term receivables.

Of course, SaltX Technology Holding has a market capitalization of kr535.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, SaltX Technology Holding has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is SaltX Technology Holding'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 SaltX Technology Holding had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to kr10m. We would much prefer see growth.

Caveat Emptor

Importantly, SaltX Technology Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr51m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr54m of cash over the last year. So in short it's a really risky stock. 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 example SaltX Technology Holding has 4 warning signs (and 3 which are significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.