Here's Why SolTech Energy Sweden (STO:SOLT) Has A Meaningful Debt Burden

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 can see that SolTech Energy Sweden AB (publ) (STO:SOLT) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 SolTech Energy Sweden

What Is SolTech Energy Sweden's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 SolTech Energy Sweden had debt of kr157.0m, up from kr136.4m in one year. But on the other hand it also has kr212.3m in cash, leading to a kr55.2m net cash position.

A Look At SolTech Energy Sweden's Liabilities

According to the last reported balance sheet, SolTech Energy Sweden had liabilities of kr947.9m due within 12 months, and liabilities of kr537.7m due beyond 12 months. Offsetting this, it had kr212.3m in cash and kr572.5m in receivables that were due within 12 months. So it has liabilities totalling kr700.8m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's kr624.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. SolTech Energy Sweden boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, SolTech Energy Sweden made a loss at the EBIT level, last year, but improved that to positive EBIT of kr52m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is SolTech Energy Sweden's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SolTech Energy Sweden 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. During the last year, SolTech Energy Sweden burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While SolTech Energy Sweden does have more liabilities than liquid assets, it also has net cash of kr55.2m. Despite the cash, we do find SolTech Energy Sweden's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the 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 instance, we've identified 3 warning signs for SolTech Energy Sweden (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.