Fortnox (STO:FNOX) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Fortnox AB (publ) (STO:FNOX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fortnox

What Is Fortnox's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Fortnox had debt of kr200.0m, up from none in one year. But it also has kr329.9m in cash to offset that, meaning it has kr129.9m net cash.

How Healthy Is Fortnox's Balance Sheet?

The latest balance sheet data shows that Fortnox had liabilities of kr485.9m due within a year, and liabilities of kr466.5m falling due after that. On the other hand, it had cash of kr329.9m and kr412.1m worth of receivables due within a year. So it has liabilities totalling kr210.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that Fortnox's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr25.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Fortnox boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Fortnox has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Fortnox can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Fortnox's liabilities, but we can be reassured by the fact it has has net cash of kr129.9m. And we liked the look of last year's 36% 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.

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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.