Tobii (STO:TOBII) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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. As with many other companies Tobii AB (publ) (STO:TOBII) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tobii

What Is Tobii's Debt?

The image below, which you can click on for greater detail, shows that Tobii had debt of kr16.0m at the end of March 2022, a reduction from kr463.9m over a year. But on the other hand it also has kr402.0m in cash, leading to a kr386.0m net cash position.

How Strong Is Tobii's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tobii had liabilities of kr256.0m due within 12 months and liabilities of kr83.0m due beyond that. Offsetting these obligations, it had cash of kr402.0m as well as receivables valued at kr169.0m due within 12 months. So it can boast kr232.0m 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. Succinctly put, Tobii boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Tobii reported revenue of kr643m, which is a gain of 88%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Tobii?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Tobii had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr125m and booked a kr191m accounting loss. However, it has net cash of kr386.0m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Tobii may be on a path to profitability. 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. For instance, we've identified 3 warning signs for Tobii that you should be aware of.

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.