Is Marimekko Oyj (HEL:MEKKO) Using Too Much Debt?

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. Importantly, Marimekko Oyj (HEL:MEKKO) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Marimekko Oyj

How Much Debt Does Marimekko Oyj Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Marimekko Oyj had debt of €2.49m, up from €965.0k in one year. However, it does have €47.0m in cash offsetting this, leading to net cash of €44.5m.

A Look At Marimekko Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that Marimekko Oyj had liabilities of €29.3m due within 12 months and liabilities of €22.7m due beyond that. Offsetting this, it had €47.0m in cash and €10.9m in receivables that were due within 12 months. So it actually has €5.79m more liquid assets than total liabilities.

Having regard to Marimekko Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €549.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Marimekko Oyj has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Marimekko Oyj has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Marimekko Oyj's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Marimekko 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, Marimekko Oyj actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Marimekko Oyj has €44.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €31m, being 116% of its EBIT. So is Marimekko Oyj's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Marimekko Oyj, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.