Is SRV Yhtiöt Oyj (HEL:SRV1V) Weighed On By Its Debt Load?

March 16, 2020
  •  Updated
September 29, 2022
HLSE:SRV1V
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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. 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. We can see that SRV Yhtiöt Oyj (HEL:SRV1V) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SRV Yhtiöt Oyj

What Is SRV Yhtiöt Oyj's Debt?

As you can see below, SRV Yhtiöt Oyj had €308.4m of debt at December 2019, down from €382.5m a year prior. On the flip side, it has €27.7m in cash leading to net debt of about €280.7m.

HLSE:SRV1V Historical Debt, March 17th 2020
HLSE:SRV1V Historical Debt, March 17th 2020

How Healthy Is SRV Yhtiöt Oyj's Balance Sheet?

The latest balance sheet data shows that SRV Yhtiöt Oyj had liabilities of €279.4m due within a year, and liabilities of €458.3m falling due after that. Offsetting this, it had €27.7m in cash and €118.9m in receivables that were due within 12 months. So its liabilities total €591.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €57.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, SRV Yhtiöt Oyj would likely require a major re-capitalisation if it had to pay its creditors today. 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 SRV Yhtiöt 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.

Over 12 months, SRV Yhtiöt Oyj reported revenue of €1.1b, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months SRV Yhtiöt Oyj produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €11m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through €13m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for SRV Yhtiöt Oyj you should be aware of.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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