Is Terranet (STO:TERRNT B) Weighed On By Its Debt Load?

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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Terranet

What Is Terranet's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Terranet had debt of kr33.0m, up from kr18.8m in one year. But on the other hand it also has kr46.8m in cash, leading to a kr13.8m net cash position.

A Look At Terranet's Liabilities

The latest balance sheet data shows that Terranet had liabilities of kr25.3m due within a year, and liabilities of kr18.2m falling due after that. Offsetting these obligations, it had cash of kr46.8m as well as receivables valued at kr940.0k due within 12 months. So it can boast kr4.22m more liquid assets than total liabilities.

Having regard to Terranet's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr428.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Terranet has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 kr8.0m, which is a gain of 81%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Terranet?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Terranet had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr44m and booked a kr36m accounting loss. With only kr13.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Terranet's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger 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. We've identified 4 warning signs with Terranet (at least 2 which are significant) , and understanding them should be part of your investment process.

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.

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.

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