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We Think Nokia (HEL:NOKIA) Is Taking Some Risk With Its Debt

Simply Wall St

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 Nokia Corporation (HEL:NOKIA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nokia

What Is Nokia's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2019 Nokia had debt of €4.29b, up from €3.72b in one year. However, its balance sheet shows it holds €5.08b in cash, so it actually has €789.0m net cash.

HLSE:NOKIA Historical Debt, October 11th 2019

A Look At Nokia's Liabilities

We can see from the most recent balance sheet that Nokia had liabilities of €12.4b falling due within a year, and liabilities of €12.1b due beyond that. Offsetting this, it had €5.08b in cash and €7.99b in receivables that were due within 12 months. So it has liabilities totalling €11.5b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Nokia is worth a massive €25.3b, 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. Despite its noteworthy liabilities, Nokia boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Nokia grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. 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 Nokia 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nokia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Nokia actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

Although Nokia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €789.0m. And it also grew its EBIT by 5.4% over the last year. So although we see some areas for improvement, we're not too worried about Nokia's balance sheet. Even though Nokia lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check outhow earnings have been trending over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.