Here's Why Terranet (STO:TERRNT B) Can Manage Its Debt Despite Losing Money

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Terranet AB (STO:TERRNT B) 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Terranet

What Is Terranet's Debt?

As you can see below, at the end of September 2021, Terranet had kr34.0m of debt, up from kr5.96m a year ago. Click the image for more detail. However, it does have kr73.0m in cash offsetting this, leading to net cash of kr39.0m.

How Strong Is Terranet's Balance Sheet?

We can see from the most recent balance sheet that Terranet had liabilities of kr6.77m falling due within a year, and liabilities of kr35.6m due beyond that. Offsetting this, it had kr73.0m in cash and kr1.22m in receivables that were due within 12 months. So it can boast kr31.9m more liquid assets than total liabilities.

This surplus suggests that Terranet has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Terranet boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Terranet will need earnings to service that debt. 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.

In the last year Terranet wasn't profitable at an EBIT level, but managed to grow its revenue by 216%, to kr11m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Terranet?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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 kr49m and booked a kr37m accounting loss. Given it only has net cash of kr39.0m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Terranet has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 4 warning signs we've spotted with Terranet (including 1 which is a bit unpleasant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.