Is SaltX Technology Holding (STO:SALT B) Using Debt In A Risky Way?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that SaltX Technology Holding AB (STO:SALT B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SaltX Technology Holding

What Is SaltX Technology Holding's Debt?

The image below, which you can click on for greater detail, shows that SaltX Technology Holding had debt of kr27.7m at the end of September 2020, a reduction from kr28.9m over a year. But on the other hand it also has kr54.7m in cash, leading to a kr27.0m net cash position.

How Healthy Is SaltX Technology Holding's Balance Sheet?

According to the last reported balance sheet, SaltX Technology Holding had liabilities of kr8.47m due within 12 months, and liabilities of kr30.7m due beyond 12 months. On the other hand, it had cash of kr54.7m and kr2.22m worth of receivables due within a year. So it actually has kr17.8m more liquid assets than total liabilities.

This surplus suggests that SaltX Technology Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SaltX Technology Holding has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 49%, to kr961k. That makes us nervous, to say the least.

So How Risky Is SaltX Technology Holding?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SaltX Technology Holding had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr37m and booked a kr39m accounting loss. However, it has net cash of kr27.0m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 example, we've discovered 5 warning signs for SaltX Technology Holding (2 are concerning!) that you should be aware of before investing here.

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. 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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