Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Fortnox AB (publisher) (STO:FNOX) is in debt. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
See our latest analysis for Fortnox
What is Fortnox’s debt?
You can click on the graph below for historical figures, but it shows that as of March 2022, Fortnox had 200.0 million kr in debt, an increase of none, year on year. But on the other hand, he also has 306.8 million kr in cash, resulting in a net cash position of 106.8 million kr.
How healthy is Fortnox’s balance sheet?
According to the latest published balance sheet, Fortnox had liabilities of 440.3 million kr due within 12 months and liabilities of 466.9 million kr due beyond 12 months. On the other hand, it had a cash position of 306.8 million kr and 365.5 million kr of receivables due within one year. Thus, its liabilities total 234.9 million kr more than the combination of its cash and short-term receivables.
Considering the size of Fortnox, it appears its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the 29.5 billion kr company struggling to find cash, we still think it’s worth keeping an eye on its balance sheet. While it has liabilities worth noting, Fortnox also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Another good sign, Fortnox was able to increase its EBIT by 26% in twelve months, thus facilitating the repayment of its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Fortnox’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a company can only repay its debts with cash, not book profits. Although Fortnox has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. . Over the past three years, Fortnox has produced strong free cash flow equivalent to 70% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
While it is always a good idea to look at a company’s total liabilities, it is very reassuring that Fortnox has 106.8 million kr in net cash. And we liked the look of EBIT growth of 26% YoY last year. We therefore do not believe that Fortnox’s use of debt is risky. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of Fortnox’s earnings per share history for free.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.