Is Thunderful Group (STO:THUNDR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Thunderful Group AB (STO:THUNDR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Thunderful Group

How Much Debt Does Thunderful Group Carry?

As you can see below, at the end of December 2023, Thunderful Group had kr499.3m of debt, up from kr174.9m a year ago. Click the image for more detail. However, because it has a cash reserve of kr209.1m, its net debt is less, at about kr290.2m.

How Healthy Is Thunderful Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Thunderful Group had liabilities of kr1.39b due within 12 months and liabilities of kr422.6m due beyond that. Offsetting this, it had kr209.1m in cash and kr502.2m in receivables that were due within 12 months. So its liabilities total kr1.10b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr144.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Thunderful Group would likely require a major re-capitalisation if it had to pay its creditors today. 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 Thunderful 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.

In the last year Thunderful Group had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to kr3.0b. That's not what we would hope to see.

Caveat Emptor

Importantly, Thunderful Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr610m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through kr23m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Thunderful Group (of which 1 makes us a bit uncomfortable!) 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.