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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Heeros Oyj (HEL:HEEROS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Heeros Oyj Carry?
The image below, which you can click on for greater detail, shows that at December 2018 Heeros Oyj had debt of €1.68m, up from €841.4k in one year. However, because it has a cash reserve of €642.0k, its net debt is less, at about €1.03m.
How Strong Is Heeros Oyj's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Heeros Oyj had liabilities of €2.54m due within 12 months and liabilities of €1.68m due beyond that. Offsetting this, it had €642.0k in cash and €1.08m in receivables that were due within 12 months. So it has liabilities totalling €2.50m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Heeros Oyj is worth €9.40m, 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. 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 Heeros Oyj's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Heeros Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by10%, to €8.0m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Heeros Oyj had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost €312k 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. For example, we would not want to see a repeat of last year's loss of €507k. So we do think this stock is quite risky. For riskier companies like Heeros Oyj I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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