Is Merus Power Oyj (HEL:MERUS) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Merus Power Oyj (HEL:MERUS) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Merus Power Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Merus Power Oyj had €1.80m of debt in December 2024, down from €4.02m, one year before. But on the other hand it also has €2.97m in cash, leading to a €1.17m net cash position.

A Look At Merus Power Oyj's Liabilities

We can see from the most recent balance sheet that Merus Power Oyj had liabilities of €16.1m falling due within a year, and liabilities of €1.10m due beyond that. Offsetting this, it had €2.97m in cash and €4.25m in receivables that were due within 12 months. So its liabilities total €9.96m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Merus Power Oyj has a market capitalization of €38.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Merus Power Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Merus Power Oyj 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.

See our latest analysis for Merus Power Oyj

In the last year Merus Power Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to €38m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Merus Power Oyj?

Although Merus Power Oyj had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €2.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Merus Power Oyj is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Case in point: We've spotted 2 warning signs for Merus Power Oyj you should be aware of, and 1 of them is significant.

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.

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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.