Health Check: How Prudently Does Anoto Group (STO:ANOT) Use Debt?

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. As with many other companies Anoto Group AB (publ) (STO:ANOT) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that ANOT is potentially overvalued!

How Much Debt Does Anoto Group Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Anoto Group had debt of kr54.6m, up from kr21.8m in one year. On the flip side, it has kr3.36m in cash leading to net debt of about kr51.3m.

A Look At Anoto Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Anoto Group had liabilities of kr138.8m due within 12 months and liabilities of kr79.0k due beyond that. Offsetting these obligations, it had cash of kr3.36m as well as receivables valued at kr10.4m due within 12 months. So it has liabilities totalling kr125.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr133.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Anoto Group'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.

In the last year Anoto Group wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to kr81m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Anoto Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable kr54m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr56m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 3 warning signs for Anoto Group (1 can't be ignored) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.