Is Sensys Gatso Group (STO:SENS) 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.' 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 can see that Sensys Gatso Group AB (publ) (STO:SENS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sensys Gatso Group

How Much Debt Does Sensys Gatso Group Carry?

As you can see below, at the end of September 2020, Sensys Gatso Group had kr104.8m of debt, up from kr97.4m a year ago. Click the image for more detail. But it also has kr127.5m in cash to offset that, meaning it has kr22.7m net cash.

How Strong Is Sensys Gatso Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sensys Gatso Group had liabilities of kr190.5m due within 12 months and liabilities of kr74.1m due beyond that. Offsetting this, it had kr127.5m in cash and kr71.2m in receivables that were due within 12 months. So its liabilities total kr65.8m more than the combination of its cash and short-term receivables.

Given Sensys Gatso Group has a market capitalization of kr1.28b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sensys Gatso Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Sensys Gatso Group made a loss at the EBIT level, last year, but improved that to positive EBIT of kr8.7m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sensys Gatso Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sensys Gatso Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Sensys Gatso Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Sensys Gatso Group's liabilities, but we can be reassured by the fact it has has net cash of kr22.7m. The cherry on top was that in converted 228% of that EBIT to free cash flow, bringing in kr20m. So we don't have any problem with Sensys Gatso Group's use of debt. 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. For example - Sensys Gatso Group has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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