Lohilo Foods (STO:LOHILO) Is Carrying A Fair Bit Of Debt

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. We note that Lohilo Foods AB (publ) (STO:LOHILO) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lohilo Foods

How Much Debt Does Lohilo Foods Carry?

As you can see below, Lohilo Foods had kr17.3m of debt at March 2024, down from kr21.6m a year prior. However, because it has a cash reserve of kr1.95m, its net debt is less, at about kr15.3m.

How Healthy Is Lohilo Foods' Balance Sheet?

The latest balance sheet data shows that Lohilo Foods had liabilities of kr63.8m due within a year, and liabilities of kr7.81m falling due after that. Offsetting these obligations, it had cash of kr1.95m as well as receivables valued at kr21.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr48.4m.

This deficit is considerable relative to its market capitalization of kr78.7m, so it does suggest shareholders should keep an eye on Lohilo Foods' use of debt. 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 Lohilo Foods 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 Lohilo Foods had a loss before interest and tax, and actually shrunk its revenue by 15%, to kr185m. We would much prefer see growth.

Caveat Emptor

While Lohilo Foods's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr20m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 kr14m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Lohilo Foods has 4 warning signs we think 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.