Does Footway Group (STO:FOOT B) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Footway Group AB (publ) (STO:FOOT B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Footway Group

What Is Footway Group's Net Debt?

As you can see below, Footway Group had kr304.0m of debt at June 2022, down from kr406.0m a year prior. However, it does have kr10.0m in cash offsetting this, leading to net debt of about kr294.0m.

A Look At Footway Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Footway Group had liabilities of kr597.0m due within 12 months and no liabilities due beyond that. Offsetting this, it had kr10.0m in cash and kr45.0m in receivables that were due within 12 months. So its liabilities total kr542.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr358.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Footway Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Footway Group'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 Footway Group had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to kr1.3b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Footway Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr93m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr35m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Be aware that Footway Group is showing 5 warning signs in our investment analysis , and 2 of those can't be ignored...

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.