Cinis Fertilizer (STO:CINIS) Is Making Moderate Use Of Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cinis Fertilizer AB (publ) (STO:CINIS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cinis Fertilizer

What Is Cinis Fertilizer's Net Debt?

As you can see below, at the end of December 2023, Cinis Fertilizer had kr296.4m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of kr128.8m, its net debt is less, at about kr167.6m.

A Look At Cinis Fertilizer's Liabilities

According to the last reported balance sheet, Cinis Fertilizer had liabilities of kr85.6m due within 12 months, and liabilities of kr296.4m due beyond 12 months. On the other hand, it had cash of kr128.8m and kr22.7m worth of receivables due within a year. So it has liabilities totalling kr230.5m more than its cash and near-term receivables, combined.

Since publicly traded Cinis Fertilizer shares are worth a total of kr2.55b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cinis Fertilizer can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given it has no significant operating revenue at the moment, shareholders will be hoping Cinis Fertilizer can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Over the last twelve months Cinis Fertilizer produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr36m. 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. However, it doesn't help that it burned through kr574m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Cinis Fertilizer (including 2 which are concerning) .

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.