Is SolTech Energy Sweden (STO:SOLT) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. We can see that SolTech Energy Sweden AB (publ) (STO:SOLT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SolTech Energy Sweden

What Is SolTech Energy Sweden’s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 SolTech Energy Sweden had kr136.4m of debt, an increase on kr85.0m, over one year. But it also has kr275.4m in cash to offset that, meaning it has kr138.9m net cash.

How Strong Is SolTech Energy Sweden’s Balance Sheet?

According to the last reported balance sheet, SolTech Energy Sweden had liabilities of kr692.7m due within 12 months, and liabilities of kr511.7m due beyond 12 months. Offsetting these obligations, it had cash of kr275.4m as well as receivables valued at kr497.6m due within 12 months. So it has liabilities totalling kr431.4m more than its cash and near-term receivables, combined.

This deficit isn’t so bad because SolTech Energy Sweden is worth kr1.68b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, SolTech Energy Sweden also has more cash than debt, so we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SolTech Energy Sweden’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SolTech Energy Sweden reported revenue of kr1.9b, which is a gain of 112%, although it did not report any earnings before interest and tax. So there’s no doubt that shareholders are cheering for growth

So How Risky Is SolTech Energy Sweden?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that SolTech Energy Sweden had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr220m of cash and made a loss of kr263m. With only kr138.9m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that SolTech Energy Sweden has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 4 warning signs for SolTech Energy Sweden (of which 2 don’t sit too well with us!) 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. 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.