Is Tobii (STO:TOBII) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Tobii AB (publ) (STO:TOBII) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tobii

What Is Tobii's Net Debt?

The image below, which you can click on for greater detail, shows that Tobii had debt of kr16.0m at the end of December 2022, a reduction from kr17.0m over a year. However, it does have kr402.0m in cash offsetting this, leading to net cash of kr386.0m.

How Strong Is Tobii's Balance Sheet?

We can see from the most recent balance sheet that Tobii had liabilities of kr397.0m falling due within a year, and liabilities of kr73.0m due beyond that. Offsetting these obligations, it had cash of kr402.0m as well as receivables valued at kr202.0m due within 12 months. So it can boast kr134.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Tobii could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tobii has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Tobii wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to kr776m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Tobii?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Tobii had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr33m of cash and made a loss of kr99m. But at least it has kr386.0m on the balance sheet to spend on growth, near-term. Tobii's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often 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. 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, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.