Is Smart Eye (STO:SEYE) A Risky Investment?

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 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 can see that Smart Eye AB (publ) (STO:SEYE) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Smart Eye

How Much Debt Does Smart Eye Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Smart Eye had debt of kr79.0m, up from kr1.17m in one year. But on the other hand it also has kr214.6m in cash, leading to a kr135.6m net cash position.

How Healthy Is Smart Eye's Balance Sheet?

The latest balance sheet data shows that Smart Eye had liabilities of kr86.9m due within a year, and liabilities of kr201.2m falling due after that. Offsetting these obligations, it had cash of kr214.6m as well as receivables valued at kr52.7m due within 12 months. So it has liabilities totalling kr20.8m more than its cash and near-term receivables, combined.

Having regard to Smart Eye's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr1.28b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Smart Eye 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 it is future earnings, more than anything, that will determine Smart Eye's ability to maintain a healthy balance sheet going forward. 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, Smart Eye reported revenue of kr145m, which is a gain of 121%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Smart Eye?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Smart Eye lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr205m of cash and made a loss of kr186m. Given it only has net cash of kr135.6m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Smart Eye's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Smart Eye is showing 2 warning signs in our investment analysis , 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.