Is Anoto Group (STO:ANOT) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Anoto Group AB (publ) (STO:ANOT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Anoto Group had kr74.5m of debt, an increase on kr54.6m, over one year. However, because it has a cash reserve of kr6.55m, its net debt is less, at about kr67.9m.

A Look At Anoto Group's Liabilities

We can see from the most recent balance sheet that Anoto Group had liabilities of kr140.1m falling due within a year, and liabilities of kr718.0k due beyond that. Offsetting this, it had kr6.55m in cash and kr8.98m in receivables that were due within 12 months. So it has liabilities totalling kr125.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr137.9m, so it does suggest shareholders should keep an eye on Anoto Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Anoto Group made a loss at the EBIT level, and saw its revenue drop to kr54m, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Anoto Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping kr69m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr16m in negative free cash flow over the last twelve months. 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 Anoto Group has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.

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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.