We Think Anoto Group (STO:ANOT) Has A Fair Chunk Of 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.' 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. We note that Anoto Group AB (publ) (STO:ANOT) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See 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 December 2020 Anoto Group had kr24.6m of debt, an increase on kr8.18m, over one year. On the flip side, it has kr2.13m in cash leading to net debt of about kr22.5m.

How Healthy Is Anoto Group's Balance Sheet?

We can see from the most recent balance sheet that Anoto Group had liabilities of kr47.6m falling due within a year, and liabilities of kr21.7m due beyond that. Offsetting this, it had kr2.13m in cash and kr24.0m in receivables that were due within 12 months. So its liabilities total kr43.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Anoto Group is worth kr168.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Anoto Group's earnings that will influence how the balance sheet holds up in the future. 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 kr71m, which is a fall of 37%. 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). Indeed, it lost a very considerable kr103m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr53m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Anoto Group is showing 3 warning signs in our investment analysis , and 1 of those 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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