Is Fortnox (STO:FNOX) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Fortnox AB (publ) (STO:FNOX) does use debt in its business. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Fortnox had kr200.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds kr374.7m in cash, so it actually has kr174.7m net cash.

How Strong Is Fortnox's Balance Sheet?

We can see from the most recent balance sheet that Fortnox had liabilities of kr506.5m falling due within a year, and liabilities of kr461.8m due beyond that. On the other hand, it had cash of kr374.7m and kr455.4m worth of receivables due within a year. So it has liabilities totalling kr138.2m 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 kr31.9b 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.

On top of that, Fortnox grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fortnox may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Fortnox produced sturdy free cash flow equating to 70% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fortnox has kr174.7m in net cash. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think Fortnox's use of debt is 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. To that end, you should be aware of the 1 warning sign we've spotted with Fortnox .

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.