Here's Why Cinis Fertilizer (STO:CINIS) Can Afford Some 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.' 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 Cinis Fertilizer AB (publ) (STO:CINIS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cinis Fertilizer

What Is Cinis Fertilizer's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Cinis Fertilizer had debt of kr408.0m, up from none in one year. However, it also had kr27.0m in cash, and so its net debt is kr381.0m.

A Look At Cinis Fertilizer's Liabilities

Zooming in on the latest balance sheet data, we can see that Cinis Fertilizer had liabilities of kr155.2m due within 12 months and liabilities of kr350.0m due beyond that. Offsetting this, it had kr27.0m in cash and kr3.20m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr475.0m.

While this might seem like a lot, it is not so bad since Cinis Fertilizer has a market capitalization of kr1.46b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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. Indeed, it lost kr56m 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 kr589m 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. For example Cinis Fertilizer has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.