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. Importantly, Martela Oyj (HEL:MARAS) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out 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 €5.78m of debt in March 2021, down from €8.97m, one year before. But on the other hand it also has €9.44m in cash, leading to a €3.66m net cash position.
How Healthy Is Martela Oyj's Balance Sheet?
According to the last reported balance sheet, Martela Oyj had liabilities of €29.2m due within 12 months, and liabilities of €6.89m due beyond 12 months. Offsetting these obligations, it had cash of €9.44m as well as receivables valued at €10.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €15.8m.
When you consider that this deficiency exceeds the company's €13.3m 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. Martela Oyj boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant 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 Martela Oyj can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Martela Oyj had a loss before interest and tax, and actually shrunk its revenue by 15%, to €87m. That's not what we would hope to see.
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 €5.5m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. For instance, we've identified 2 warning signs 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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About HLSE:MARAS
Martela Oyj
Operates in the workplace industry in Finland, Sweden, Norway, and internationally.
Undervalued with excellent balance sheet.
