Is Fiskars Oyj Abp (HEL:FSKRS) Using Too Much Debt?

By
Simply Wall St
Published
July 24, 2021
HLSE:FSKRS
Source: Shutterstock

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.' 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. As with many other companies Fiskars Oyj Abp (HEL:FSKRS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Fiskars Oyj Abp

What Is Fiskars Oyj Abp's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fiskars Oyj Abp had €116.4m of debt in March 2021, down from €334.2m, one year before. However, it also had €31.1m in cash, and so its net debt is €85.3m.

debt-equity-history-analysis
HLSE:FSKRS Debt to Equity History July 24th 2021

How Healthy Is Fiskars Oyj Abp's Balance Sheet?

We can see from the most recent balance sheet that Fiskars Oyj Abp had liabilities of €435.3m falling due within a year, and liabilities of €174.7m due beyond that. On the other hand, it had cash of €31.1m and €252.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €326.5m.

Fiskars Oyj Abp has a market capitalization of €1.61b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Fiskars Oyj Abp has a low net debt to EBITDA ratio of only 0.50. And its EBIT covers its interest expense a whopping 13.2 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, Fiskars Oyj Abp grew its EBIT by 176% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fiskars Oyj Abp 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Fiskars Oyj Abp actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that Fiskars Oyj Abp's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Overall, we don't think Fiskars Oyj Abp is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Fiskars Oyj Abp you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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