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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Terranet AB (STO:TERRNT B) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Terranet

What Is Terranet's Debt?

As you can see below, Terranet had kr30.7m of debt at June 2022, down from kr33.0m a year prior. But it also has kr41.5m in cash to offset that, meaning it has kr10.9m net cash.

A Look At Terranet's Liabilities

We can see from the most recent balance sheet that Terranet had liabilities of kr35.4m falling due within a year, and liabilities of kr1.29m due beyond that. Offsetting this, it had kr41.5m in cash and kr709.0k in receivables that were due within 12 months. So it actually has kr5.55m 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Terranet had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to kr6.7m. That's not what we would hope to see.

So How Risky Is Terranet?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Terranet had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr40m of cash and made a loss of kr42m. Given it only has net cash of kr10.9m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 learn about the 3 warning signs we've spotted with Terranet (including 1 which doesn't sit too well with us) .

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.