Is SRV Yhtiöt Oyj (HEL:SRV1V) Using Debt Sensibly?

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 SRV Yhtiöt Oyj (HEL:SRV1V) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for SRV Yhtiöt Oyj

How Much Debt Does SRV Yhtiöt Oyj Carry?

You can click the graphic below for the historical numbers, but it shows that SRV Yhtiöt Oyj had €41.6m of debt in June 2022, down from €220.6m, one year before. But on the other hand it also has €45.7m in cash, leading to a €4.10m net cash position.

How Healthy Is SRV Yhtiöt Oyj's Balance Sheet?

We can see from the most recent balance sheet that SRV Yhtiöt Oyj had liabilities of €196.3m falling due within a year, and liabilities of €145.0m due beyond that. Offsetting these obligations, it had cash of €45.7m as well as receivables valued at €119.6m due within 12 months. So its liabilities total €176.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €55.2m 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 definitely think shareholders need to watch this one closely. At the end of the day, SRV Yhtiöt Oyj would probably need a major re-capitalization if its creditors were to demand repayment. Given that SRV Yhtiöt Oyj has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SRV Yhtiöt 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.

In the last year SRV Yhtiöt Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 2.4%, to €930m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is SRV Yhtiöt Oyj?

While SRV Yhtiöt Oyj lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €57m. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for SRV Yhtiöt Oyj (1 is significant) you should be aware of.

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.