Is Anoto Group (STO:ANOT) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Anoto Group AB (publ) (STO:ANOT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Anoto Group

How Much Debt Does Anoto Group Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Anoto Group had debt of kr20.3m, up from kr14.5m in one year. However, it does have kr3.99m in cash offsetting this, leading to net debt of about kr16.3m.

How Healthy Is Anoto Group's Balance Sheet?

We can see from the most recent balance sheet that Anoto Group had liabilities of kr47.9m falling due within a year, and liabilities of kr18.6m due beyond that. Offsetting these obligations, it had cash of kr3.99m as well as receivables valued at kr29.7m due within 12 months. So its liabilities total kr32.9m more than the combination of its cash and short-term receivables.

Anoto Group has a market capitalization of kr156.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anoto Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Anoto Group made a loss at the EBIT level, and saw its revenue drop to kr82m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Anoto Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr91m. 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 kr76m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Anoto Group you should be aware of, and 1 of them is a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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