Is Tellusgruppen (STO:TELLUS) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Tellusgruppen AB (publ) (STO:TELLUS) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tellusgruppen

What Is Tellusgruppen's Debt?

The chart below, which you can click on for greater detail, shows that Tellusgruppen had kr44.4m in debt in December 2023; about the same as the year before. However, because it has a cash reserve of kr1.15m, its net debt is less, at about kr43.3m.

How Healthy Is Tellusgruppen's Balance Sheet?

We can see from the most recent balance sheet that Tellusgruppen had liabilities of kr49.6m falling due within a year, and liabilities of kr71.6m due beyond that. Offsetting this, it had kr1.15m in cash and kr29.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr90.8m.

This is a mountain of leverage relative to its market capitalization of kr95.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 Tellusgruppen 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 Tellusgruppen wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to kr399m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Tellusgruppen still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr11m 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. For example, we would not want to see a repeat of last year's loss of kr17m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Tellusgruppen (2 are concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.