Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Agtira AB (NGM:AGTIRA B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Agtira
What Is Agtira's Net Debt?
As you can see below, Agtira had kr23.6m of debt at December 2021, down from kr26.7m a year prior. On the flip side, it has kr14.4m in cash leading to net debt of about kr9.24m.
How Strong Is Agtira's Balance Sheet?
According to the last reported balance sheet, Agtira had liabilities of kr12.7m due within 12 months, and liabilities of kr19.8m due beyond 12 months. On the other hand, it had cash of kr14.4m and kr4.55m worth of receivables due within a year. So its liabilities total kr13.5m more than the combination of its cash and short-term receivables.
Given Agtira has a market capitalization of kr394.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Agtira 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.
Over 12 months, Agtira reported revenue of kr21m, which is a gain of 55%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Agtira still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr18m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr27m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 6 warning signs for Agtira you should be aware of, and 2 of them shouldn't be ignored.
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.
About OM:AGTIRA B
Medium-low and overvalued.
