Is Awardit (STO:AWRD) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Awardit AB (publ) (STO:AWRD) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Awardit

What Is Awardit's Net Debt?

As you can see below, at the end of December 2021, Awardit had kr234.6m of debt, up from kr44.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr240.2m in cash, so it actually has kr5.62m net cash.

How Strong Is Awardit's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Awardit had liabilities of kr393.3m due within 12 months and liabilities of kr269.6m due beyond that. On the other hand, it had cash of kr240.2m and kr248.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr174.5m.

Of course, Awardit has a market capitalization of kr1.96b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Awardit boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Awardit's EBIT launched higher than Elon Musk, gaining a whopping 123% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Awardit can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Awardit may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Awardit recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Awardit's liabilities, but we can be reassured by the fact it has has net cash of kr5.62m. And we liked the look of last year's 123% year-on-year EBIT growth. So is Awardit's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Awardit that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.