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. We can see that Oatly Group AB (NASDAQ:OTLY) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Oatly Group

What Is Oatly Group's Debt?

As you can see below, at the end of September 2024, Oatly Group had US$441.3m of debt, up from US$407.9m a year ago. Click the image for more detail. However, it does have US$119.3m in cash offsetting this, leading to net debt of about US$321.9m.

How Strong Is Oatly Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Oatly Group had liabilities of US$536.7m due within 12 months and liabilities of US$152.9m due beyond that. On the other hand, it had cash of US$119.3m and US$117.7m worth of receivables due within a year. So it has liabilities totalling US$452.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$359.8m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 5.1%, to US$813m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Oatly Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$150m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$164m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Oatly Group is showing 3 warning signs in our investment analysis , 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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