Is Anoto Group (STO:ANOT) Using Too Much Debt?

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.' 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, Anoto Group AB (publ) (STO:ANOT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Anoto Group

What Is Anoto Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Anoto Group had debt of kr72.2m, up from kr41.2m in one year. However, it does have kr1.72m in cash offsetting this, leading to net debt of about kr70.4m.

How Healthy Is Anoto Group's Balance Sheet?

The latest balance sheet data shows that Anoto Group had liabilities of kr132.0m due within a year, and liabilities of kr15.1m falling due after that. Offsetting this, it had kr1.72m in cash and kr1.56m in receivables that were due within 12 months. So it has liabilities totalling kr143.8m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr106.0m, we think shareholders really should watch Anoto Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 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, Anoto Group made a loss at the EBIT level, and saw its revenue drop to kr69m, which is a fall of 3.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Anoto Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr47m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of kr33m over the last twelve months. That means it's on the risky side of things. 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 example, we've discovered 4 warning signs for Anoto Group (1 is significant!) that you should be aware of before investing here.

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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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.