Does Terranet (STO:TERRNT B) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Terranet AB (STO:TERRNT B) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Terranet

What Is Terranet's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Terranet had debt of kr29.8m, up from none in one year. However, it does have kr53.7m in cash offsetting this, leading to net cash of kr23.9m.

A Look At Terranet's Liabilities

Zooming in on the latest balance sheet data, we can see that Terranet had liabilities of kr6.57m due within 12 months and liabilities of kr31.2m due beyond that. On the other hand, it had cash of kr53.7m and kr1.01m worth of receivables due within a year. So it actually has kr16.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Terranet could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Terranet has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Terranet's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Terranet reported revenue of kr9.5m, which is a gain of 119%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Terranet?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Terranet lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr46m and booked a kr44m accounting loss. With only kr23.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Terranet's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Terranet (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.