Is Saniona (STO:SANION) Using Too Much 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.' 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. We can see that Saniona AB (publ) (STO:SANION) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Saniona

What Is Saniona's 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. But it also has kr647.1m in cash to offset that, meaning it has kr622.1m net cash.

A Look At Saniona's Liabilities

Zooming in on the latest balance sheet data, we can see that Saniona had liabilities of kr75.8m due within 12 months and liabilities of kr20.4m due beyond that. On the other hand, it had cash of kr647.1m and kr40.6m worth of receivables due within a year. So it actually has kr591.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Saniona's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Saniona boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Saniona's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Saniona had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to kr4.6m. That's not what we would hope to see.

So How Risky Is Saniona?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Saniona had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr153m and booked a kr121m accounting loss. Given it only has net cash of kr622.1m, the company may need to raise more capital if it doesn't reach break-even 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. We've identified 3 warning signs with Saniona , and understanding them should be part of your investment process.

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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