Is Saxlund Group (STO:SAXG) Using Too Much Debt?

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.' 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. We can see that Saxlund Group AB (publ) (STO:SAXG) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Saxlund Group

What Is Saxlund Group's Debt?

As you can see below, at the end of March 2023, Saxlund Group had kr22.3m of debt, up from kr18.7m a year ago. Click the image for more detail. However, it does have kr7.54m in cash offsetting this, leading to net debt of about kr14.8m.

A Look At Saxlund Group's Liabilities

According to the last reported balance sheet, Saxlund Group had liabilities of kr143.9m due within 12 months, and liabilities of kr21.0m due beyond 12 months. Offsetting these obligations, it had cash of kr7.54m as well as receivables valued at kr61.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr95.9m.

Given this deficit is actually higher than the company's market capitalization of kr77.1m, we think shareholders really should watch Saxlund Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Saxlund Group will need earnings to service that debt. 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.

In the last year Saxlund Group had a loss before interest and tax, and actually shrunk its revenue by 21%, to kr233m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Saxlund Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr20m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr20m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Saxlund Group , and understanding them should be part of your investment process.

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.