Is Saniona (STO:SANION) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Saniona AB (publ) (STO:SANION) makes use of debt. 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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Saniona

What Is Saniona's Net Debt?

As you can see below, at the end of September 2020, Saniona had kr25.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds kr647.1m in cash, so it actually has kr622.1m net cash.

How Healthy Is Saniona's Balance Sheet?

The latest balance sheet data shows that Saniona had liabilities of kr75.8m due within a year, and liabilities of kr20.4m falling due after that. Offsetting this, it had kr647.1m in cash and kr42.1m in receivables that were due within 12 months. So it actually has kr592.9m more liquid assets than total liabilities.

This surplus strongly suggests that Saniona has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Saniona has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Saniona's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Saniona had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to kr4.6m. We would much prefer see growth.

So How Risky Is Saniona?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Saniona had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr207m of cash and made a loss of kr121m. With only kr622.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Saniona (of which 2 are a bit concerning!) you should know about.

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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