Does Honkarakenne Oyj (HEL:HONBS) Have A Healthy 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.' 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 Honkarakenne Oyj (HEL:HONBS) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Honkarakenne Oyj

What Is Honkarakenne Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that Honkarakenne Oyj had debt of €2.00m at the end of December 2020, a reduction from €3.34m over a year. However, its balance sheet shows it holds €7.05m in cash, so it actually has €5.05m net cash.

How Healthy Is Honkarakenne Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Honkarakenne Oyj had liabilities of €14.6m due within 12 months and liabilities of €3.37m due beyond that. Offsetting this, it had €7.05m in cash and €4.73m in receivables that were due within 12 months. So its liabilities total €6.22m more than the combination of its cash and short-term receivables.

Given Honkarakenne Oyj has a market capitalization of €42.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Honkarakenne Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Honkarakenne Oyj doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Honkarakenne Oyj's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Honkarakenne Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Honkarakenne Oyj recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Honkarakenne 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 €5.05m. And it impressed us with free cash flow of €1.9m, being 86% of its EBIT. So is Honkarakenne Oyj's debt a risk? It doesn't seem so to us. 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 example, we've discovered 2 warning signs for Honkarakenne Oyj that you should be aware of before investing here.

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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