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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SRV Yhtiöt Oyj (HEL:SRV1V) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SRV Yhtiöt Oyj

What Is SRV Yhtiöt Oyj's Net Debt?

As you can see below, SRV Yhtiöt Oyj had €31.3m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €40.1m in cash, so it actually has €8.80m net cash.

How Strong Is SRV Yhtiöt Oyj's Balance Sheet?

We can see from the most recent balance sheet that SRV Yhtiöt Oyj had liabilities of €170.6m falling due within a year, and liabilities of €147.0m due beyond that. On the other hand, it had cash of €40.1m and €97.4m worth of receivables due within a year. So its liabilities total €180.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €87.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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.

Notably, SRV Yhtiöt Oyj made a loss at the EBIT level, last year, but improved that to positive EBIT of €8.8m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. SRV Yhtiöt Oyj may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, SRV Yhtiöt Oyj actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although SRV Yhtiöt Oyj's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €8.80m. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in €12m. So while SRV Yhtiöt Oyj does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 1 warning sign we've spotted with SRV Yhtiöt Oyj .

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.