Is Oatly Group (NASDAQ:OTLY) A Risky Investment?

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.' 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, Oatly Group AB (NASDAQ:OTLY) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Oatly Group

What Is Oatly Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Oatly Group had US$453.8m of debt, an increase on US$105.5m, over one year. However, it also had US$209.0m in cash, and so its net debt is US$244.8m.

How Strong Is Oatly Group's Balance Sheet?

According to the last reported balance sheet, Oatly Group had liabilities of US$578.7m due within 12 months, and liabilities of US$185.8m due beyond 12 months. Offsetting this, it had US$209.0m in cash and US$128.7m in receivables that were due within 12 months. So it has liabilities totalling US$426.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$566.7m, so it does suggest shareholders should keep an eye on Oatly Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Oatly 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 Oatly Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.7%, to US$787m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Oatly Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$202m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$181m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Oatly Group is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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