Is Aktiebolaget Fastator (STO:FASTAT) A Risky Investment?

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.' 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 Aktiebolaget Fastator (publ) (STO:FASTAT) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aktiebolaget Fastator

What Is Aktiebolaget Fastator's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Aktiebolaget Fastator had debt of kr1.82b, up from kr1.28b in one year. However, it does have kr767.1m in cash offsetting this, leading to net debt of about kr1.05b.

How Strong Is Aktiebolaget Fastator's Balance Sheet?

The latest balance sheet data shows that Aktiebolaget Fastator had liabilities of kr282.1m due within a year, and liabilities of kr1.76b falling due after that. On the other hand, it had cash of kr767.1m and kr72.2m worth of receivables due within a year. So its liabilities total kr1.20b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of kr1.65b, so it does suggest shareholders should keep an eye on Aktiebolaget Fastator's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aktiebolaget Fastator 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.

Over 12 months, Aktiebolaget Fastator reported revenue of kr273m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Aktiebolaget Fastator had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr33m 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of kr24m and the profit of kr236m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Aktiebolaget Fastator you should be aware of, and 1 of them is significant.

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. 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.
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