Is Glaston Oyj Abp (HEL:GLA1V) A Risky Investment?

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 Glaston Oyj Abp (HEL:GLA1V) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Glaston Oyj Abp

How Much Debt Does Glaston Oyj Abp Carry?

As you can see below, at the end of September 2020, Glaston Oyj Abp had €49.0m of debt, up from €43.1m a year ago. Click the image for more detail. However, it does have €20.3m in cash offsetting this, leading to net debt of about €28.7m.

How Strong Is Glaston Oyj Abp's Balance Sheet?

The latest balance sheet data shows that Glaston Oyj Abp had liabilities of €70.9m due within a year, and liabilities of €61.7m falling due after that. Offsetting these obligations, it had cash of €20.3m as well as receivables valued at €41.6m due within 12 months. So its liabilities total €70.7m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €52.3m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Glaston Oyj Abp can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Glaston Oyj Abp wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to €180m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Glaston Oyj Abp produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €670k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €5.6m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Glaston Oyj Abp is showing 3 warning signs in our investment analysis , and 1 of those is significant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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. 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.
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