Is Fingerprint Cards (STO:FING B) Using Debt Sensibly?

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 note that Fingerprint Cards AB (publ) (STO:FING B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Fingerprint Cards

How Much Debt Does Fingerprint Cards Carry?

The image below, which you can click on for greater detail, shows that Fingerprint Cards had debt of kr65.4m at the end of December 2023, a reduction from kr293.7m over a year. However, it does have kr109.9m in cash offsetting this, leading to net cash of kr44.5m.

A Look At Fingerprint Cards' Liabilities

We can see from the most recent balance sheet that Fingerprint Cards had liabilities of kr320.9m falling due within a year, and liabilities of kr78.5m due beyond that. On the other hand, it had cash of kr109.9m and kr138.5m worth of receivables due within a year. So it has liabilities totalling kr151.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Fingerprint Cards has a market capitalization of kr639.3m, 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. While it does have liabilities worth noting, Fingerprint Cards also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Fingerprint Cards made a loss at the EBIT level, and saw its revenue drop to kr705m, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is Fingerprint Cards?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Fingerprint Cards lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr134m and booked a kr347m accounting loss. Given it only has net cash of kr44.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Fingerprint Cards you should know about.

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.