Here's Why Fingerprint Cards (STO:FING B) Can Afford Some 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.' 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. We note that Fingerprint Cards AB (publ) (STO:FING B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fingerprint Cards

What Is Fingerprint Cards's Debt?

As you can see below, Fingerprint Cards had kr294.4m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr210.9m in cash offsetting this, leading to net debt of about kr83.5m.

A Look At Fingerprint Cards' Liabilities

Zooming in on the latest balance sheet data, we can see that Fingerprint Cards had liabilities of kr220.5m due within 12 months and liabilities of kr316.8m due beyond that. On the other hand, it had cash of kr210.9m and kr129.8m worth of receivables due within a year. So its liabilities total kr196.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Fingerprint Cards has a market capitalization of kr822.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Fingerprint Cards can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Fingerprint Cards had a loss before interest and tax, and actually shrunk its revenue by 48%, to kr679m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Fingerprint Cards'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 kr242m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr275m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Fingerprint Cards .

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.