These 4 Measures Indicate That Fortnox (STO:FNOX) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Fortnox AB (publ) (STO:FNOX) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Fortnox Carry?

The image below, which you can click on for greater detail, shows that Fortnox had debt of kr100.0m at the end of June 2023, a reduction from kr200.0m over a year. However, it does have kr502.0m in cash offsetting this, leading to net cash of kr402.0m.

A Look At Fortnox's Liabilities

Zooming in on the latest balance sheet data, we can see that Fortnox had liabilities of kr660.0m due within 12 months and liabilities of kr357.0m due beyond that. Offsetting these obligations, it had cash of kr502.0m as well as receivables valued at kr573.0m due within 12 months. So it can boast kr58.0m more liquid assets than total liabilities.

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 kr36.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Fortnox has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Fortnox has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fortnox has net cash of kr402.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 50% year-on-year EBIT growth. So is Fortnox's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Fortnox would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.