Here's Why Tobii (STO:TOBII) Can Afford Some 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.' 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. Importantly, Tobii AB (publ) (STO:TOBII) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tobii

How Much Debt Does Tobii Carry?

As you can see below, at the end of March 2021, Tobii had kr463.9m of debt, up from kr441.8m a year ago. Click the image for more detail. However, it also had kr422.2m in cash, and so its net debt is kr41.7m.

How Healthy Is Tobii's Balance Sheet?

We can see from the most recent balance sheet that Tobii had liabilities of kr913.5m falling due within a year, and liabilities of kr242.6m due beyond that. On the other hand, it had cash of kr422.2m and kr291.2m worth of receivables due within a year. So its liabilities total kr442.7m more than the combination of its cash and short-term receivables.

Since publicly traded Tobii shares are worth a total of kr7.59b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Tobii has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tobii'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.

In the last year Tobii had a loss before interest and tax, and actually shrunk its revenue by 8.7%, to kr1.4b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Tobii produced an earnings before interest and tax (EBIT) loss. Indeed, it lost kr102m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of kr113m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. 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 1 warning sign for Tobii 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. 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.
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