The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Heeros Oyj (HEL:HEEROS) does use debt in its business. 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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
See our latest analysis for Heeros Oyj
What Is Heeros Oyj’s Debt?
As you can see below, at the end of December 2018, Heeros Oyj had €1.68m of debt, up from €841.4k a year ago. Click the image for more detail. On the flip side, it has €642.0k in cash leading to net debt of about €1.03m.
How Healthy Is Heeros Oyj’s Balance Sheet?
The latest balance sheet data shows that Heeros Oyj had liabilities of €2.54m due within a year, and liabilities of €1.68m falling due after that. On the other hand, it had cash of €642.0k and €1.08m worth of receivables due within a year. 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 €9.66m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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 managed to grow its revenue by 10%, to €8.0m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Heeros Oyj produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €312k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through €944k of cash over the last year. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Heeros Oyj’s profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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