These 4 Measures Indicate That NoHo Partners Oyj (HEL:NOHO) Is Using Debt Extensively

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that NoHo Partners Oyj (HEL:NOHO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NoHo Partners Oyj

What Is NoHo Partners Oyj's Debt?

You can click the graphic below for the historical numbers, but it shows that NoHo Partners Oyj had €159.7m of debt in December 2021, down from €167.7m, one year before. However, it also had €6.41m in cash, and so its net debt is €153.2m.

A Look At NoHo Partners Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that NoHo Partners Oyj had liabilities of €128.1m due within 12 months and liabilities of €261.8m due beyond that. Offsetting these obligations, it had cash of €6.41m as well as receivables valued at €17.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €366.5m.

This deficit casts a shadow over the €139.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, NoHo Partners Oyj would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.093 times and a disturbingly high net debt to EBITDA ratio of 10.0 hit our confidence in NoHo Partners Oyj like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. One redeeming factor for NoHo Partners Oyj is that it turned last year's EBIT loss into a gain of €1.2m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NoHo Partners 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, NoHo Partners Oyj actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, NoHo Partners Oyj's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Overall, it seems to us that NoHo Partners Oyj's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example - NoHo Partners Oyj has 1 warning sign we think you should be aware of.

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.