Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Oyj Ahola Transport Abp (HEL:AHOLA) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Oyj Ahola Transport Abp's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Oyj Ahola Transport Abp had €6.09m of debt, an increase on €5.34m, over one year. On the flip side, it has €3.53m in cash leading to net debt of about €2.56m.
How Healthy Is Oyj Ahola Transport Abp's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Oyj Ahola Transport Abp had liabilities of €11.6m due within 12 months and liabilities of €5.52m due beyond that. Offsetting this, it had €3.53m in cash and €17.2m in receivables that were due within 12 months. So it actually has €3.64m more liquid assets than total liabilities.
This excess liquidity suggests that Oyj Ahola Transport Abp is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
While Oyj Ahola Transport Abp's low debt to EBITDA ratio of 1.2 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 2.5 last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Importantly, Oyj Ahola Transport Abp's EBIT fell a jaw-dropping 33% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Oyj Ahola Transport Abp will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Oyj Ahola Transport Abp recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Oyj Ahola Transport Abp's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its level of total liabilities was re-invigorating. We think that Oyj Ahola Transport Abp's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. Over time, share prices tend to follow earnings per share, so if you're interested in Oyj Ahola Transport Abp, you may well want to click here to check an interactive graph of its earnings per share history.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.