Is Piippo Oyj (HEL:PIIPPO) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Piippo Oyj (HEL:PIIPPO) makes use of 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Piippo Oyj

What Is Piippo Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Piippo Oyj had debt of €9.41m, up from €5.97m in one year. On the flip side, it has €233.1k in cash leading to net debt of about €9.18m.

How Healthy Is Piippo Oyj's Balance Sheet?

We can see from the most recent balance sheet that Piippo Oyj had liabilities of €11.1m falling due within a year, and liabilities of €2.00m due beyond that. On the other hand, it had cash of €233.1k and €3.55m worth of receivables due within a year. So it has liabilities totalling €9.30m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €4.29m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Piippo Oyj would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Piippo Oyj will need earnings to service that debt. 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.

In the last year Piippo Oyj had a loss before interest and tax, and actually shrunk its revenue by 17%, to €18m. That's not what we would hope to see.

Caveat Emptor

While Piippo Oyj's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €46k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €2.0m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Piippo Oyj (of which 2 make us uncomfortable!) 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. 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.