Does Honkarakenne Oyj (HEL:HONBS) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. Importantly, Honkarakenne Oyj (HEL:HONBS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Honkarakenne Oyj

What Is Honkarakenne Oyj's Net Debt?

As you can see below, Honkarakenne Oyj had €3.70m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have €6.90m in cash offsetting this, leading to net cash of €3.20m.

A Look At Honkarakenne Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that Honkarakenne Oyj had liabilities of €14.4m due within 12 months and liabilities of €3.20m due beyond that. Offsetting this, it had €6.90m in cash and €2.80m in receivables that were due within 12 months. So it has liabilities totalling €7.90m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Honkarakenne Oyj is worth €14.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Honkarakenne Oyj can strengthen its balance sheet over time. 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 Honkarakenne Oyj had a loss before interest and tax, and actually shrunk its revenue by 37%, to €38m. To be frank that doesn't bode well.

So How Risky Is Honkarakenne Oyj?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Honkarakenne Oyj lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €2.1m of cash and made a loss of €2.4m. Given it only has net cash of €3.20m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Honkarakenne Oyj is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.