Is Lehto Group Oyj (HEL:LEHTO) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Lehto Group Oyj (HEL:LEHTO) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lehto Group Oyj

How Much Debt Does Lehto Group Oyj Carry?

As you can see below, Lehto Group Oyj had €80.4m of debt at December 2020, down from €142.4m a year prior. But it also has €105.1m in cash to offset that, meaning it has €24.7m net cash.

How Healthy Is Lehto Group Oyj's Balance Sheet?

We can see from the most recent balance sheet that Lehto Group Oyj had liabilities of €205.7m falling due within a year, and liabilities of €54.5m due beyond that. Offsetting this, it had €105.1m in cash and €69.0m in receivables that were due within 12 months. So it has liabilities totalling €86.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Lehto Group Oyj is worth €156.9m, 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, Lehto Group Oyj boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lehto Group Oyj 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 Lehto Group Oyj had a loss before interest and tax, and actually shrunk its revenue by 18%, to €545m. We would much prefer see growth.

So How Risky Is Lehto Group Oyj?

While Lehto Group Oyj lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €72m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for Lehto Group 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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