Nokian Renkaat Oyj (HEL:TYRES) Has No Shortage Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Nokian Renkaat Oyj (HEL:TYRES) does carry debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 1 warning sign investors should be aware of before investing in Nokian Renkaat Oyj. Read for free now.

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Nokian Renkaat Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Nokian Renkaat Oyj had debt of €659.6m, up from €508.2m in one year. However, it does have €176.1m in cash offsetting this, leading to net debt of about €483.5m.

A Look At Nokian Renkaat Oyj's Liabilities

We can see from the most recent balance sheet that Nokian Renkaat Oyj had liabilities of €404.5m falling due within a year, and liabilities of €746.8m due beyond that. Offsetting this, it had €176.1m in cash and €318.7m in receivables that were due within 12 months. So its liabilities total €656.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €868.6m, so it does suggest shareholders should keep an eye on Nokian Renkaat Oyj's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

View our latest analysis for Nokian Renkaat Oyj

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.043 times and a disturbingly high net debt to EBITDA ratio of 6.1 hit our confidence in Nokian Renkaat Oyj like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Nokian Renkaat Oyj's EBIT was down 96% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. 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 Nokian Renkaat Oyj's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Nokian Renkaat Oyj burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Nokian Renkaat Oyj's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to instill confidence. After considering the datapoints discussed, we think Nokian Renkaat Oyj has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Nokian Renkaat Oyj 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.