Is Martela Oyj (HEL:MARAS) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Martela Oyj (HEL:MARAS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Martela Oyj

What Is Martela Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Martela Oyj had €5.91m of debt in September 2020, down from €10.0m, one year before. But on the other hand it also has €11.7m in cash, leading to a €5.78m net cash position.

A Look At Martela Oyj's Liabilities

We can see from the most recent balance sheet that Martela Oyj had liabilities of €31.9m falling due within a year, and liabilities of €7.36m due beyond that. Offsetting this, it had €11.7m in cash and €14.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €13.4m.

When you consider that this deficiency exceeds the company's €10.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Martela 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 it is future earnings, more than anything, that will determine Martela 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 Martela Oyj had a loss before interest and tax, and actually shrunk its revenue by 7.6%, to €96m. We would much prefer see growth.

So How Risky Is Martela Oyj?

Although Martela Oyj had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €8.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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. 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. For instance, we've identified 1 warning sign for Martela Oyj that 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. 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.
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