Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Fortnox AB (publ) (STO:FNOX) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Fortnox's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Fortnox had kr200.0m of debt, an increase on none, over one year. But on the other hand it also has kr306.8m in cash, leading to a kr106.8m net cash position.
How Healthy Is Fortnox's Balance Sheet?
According to the last reported balance sheet, Fortnox had liabilities of kr440.3m due within 12 months, and liabilities of kr466.9m due beyond 12 months. On the other hand, it had cash of kr306.8m and kr365.5m worth of receivables due within a year. So its liabilities total kr234.9m more than the combination of its cash and short-term receivables.
Having regard to Fortnox's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr29.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Fortnox also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that Fortnox has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fortnox's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Fortnox has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Fortnox produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Fortnox has kr106.8m in net cash. And we liked the look of last year's 26% year-on-year EBIT growth. So we don't think Fortnox's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fortnox's earnings per share history for free.
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.
Valuation is complex, but we're helping make it simple.
Find out whether Fortnox is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.