SRV Yhtiöt Oyj (HEL:SRV1V) Has A Somewhat Strained Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies SRV Yhtiöt Oyj (HEL:SRV1V) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SRV Yhtiöt Oyj

What Is SRV Yhtiöt Oyj's Debt?

The image below, which you can click on for greater detail, shows that SRV Yhtiöt Oyj had debt of €249.7m at the end of December 2020, a reduction from €308.4m over a year. However, it does have €96.7m in cash offsetting this, leading to net debt of about €153.0m.

How Strong Is SRV Yhtiöt Oyj's Balance Sheet?

The latest balance sheet data shows that SRV Yhtiöt Oyj had liabilities of €314.0m due within a year, and liabilities of €403.9m falling due after that. Offsetting this, it had €96.7m in cash and €145.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €476.1m.

This deficit casts a shadow over the €148.9m company, like a colossus towering over mere mortals. 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about SRV Yhtiöt Oyj's net debt to EBITDA ratio of 4.5, we think its super-low interest cover of 0.80 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. One redeeming factor for SRV Yhtiöt Oyj is that it turned last year's EBIT loss into a gain of €27m, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, SRV Yhtiöt Oyj actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

To be frank both SRV Yhtiöt Oyj's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the bigger picture, it seems clear to us that SRV Yhtiöt Oyj's use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. To that end, you should be aware of the 1 warning sign we've spotted with SRV Yhtiöt Oyj .

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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