Health Check: How Prudently Does Actic Group (STO:ATIC) Use Debt?

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

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Actic Group

What Is Actic Group's Debt?

The chart below, which you can click on for greater detail, shows that Actic Group had kr408.9m in debt in December 2022; about the same as the year before. However, it does have kr34.9m in cash offsetting this, leading to net debt of about kr374.0m.

A Look At Actic Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Actic Group had liabilities of kr404.2m due within 12 months and liabilities of kr854.8m due beyond that. Offsetting this, it had kr34.9m in cash and kr49.7m in receivables that were due within 12 months. So it has liabilities totalling kr1.17b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr120.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Actic Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Actic Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Actic Group wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to kr806m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Actic Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost kr3.1m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost kr36m in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Actic Group (1 shouldn't be ignored!) that you should be aware of before investing here.

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.