Terranet (STO:TERRNT B) Is Carrying A Fair Bit Of Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?
As you can see below, Terranet had kr32.4m of debt at December 2022, down from kr35.0m a year prior. However, because it has a cash reserve of kr26.7m, its net debt is less, at about kr5.71m.
How Strong Is Terranet's Balance Sheet?
We can see from the most recent balance sheet that Terranet had liabilities of kr37.8m falling due within a year, and liabilities of kr3.22m due beyond that. Offsetting this, it had kr26.7m in cash and kr1.11m in receivables that were due within 12 months. So its liabilities total kr13.2m more than the combination of its cash and short-term receivables.
Of course, Terranet has a market capitalization of kr176.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.
Over 12 months, Terranet made a loss at the EBIT level, and saw its revenue drop to kr3.1m, which is a fall of 69%. That makes us nervous, to say the least.
While Terranet's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr29m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr32m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Terranet (2 are a bit concerning!) that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About OM:TERRNT B
Terranet AB designs and develops sensor applications for road safety.
Imperfect balance sheet with weak fundamentals.