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

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.' 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 note that SRV Yhtiöt Oyj (HEL:SRV1V) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SRV Yhtiöt Oyj

How Much Debt Does SRV Yhtiöt Oyj Carry?

The chart below, which you can click on for greater detail, shows that SRV Yhtiöt Oyj had €32.3m in debt in September 2023; about the same as the year before. However, it does have €24.9m in cash offsetting this, leading to net debt of about €7.40m.

How Strong Is SRV Yhtiöt Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SRV Yhtiöt Oyj had liabilities of €147.8m due within 12 months and liabilities of €154.0m due beyond that. Offsetting this, it had €24.9m in cash and €92.1m in receivables that were due within 12 months. So its liabilities total €184.8m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €65.7m 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. After all, SRV Yhtiöt Oyj would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SRV Yhtiöt Oyj's ability to maintain a healthy balance sheet going forward. 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 had a loss before interest and tax, and actually shrunk its revenue by 34%, to €609m. To be frank that doesn't bode well.

Caveat Emptor

While SRV Yhtiöt Oyj's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €1.3m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €16m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with SRV Yhtiöt Oyj .

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. 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.