Neste Oyj (HEL:NESTE) Has A Pretty Healthy Balance Sheet

By
Simply Wall St
Published
October 17, 2021
HLSE:NESTE
Source: Shutterstock

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.' 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 Neste Oyj (HEL:NESTE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Neste Oyj

What Is Neste Oyj's Net Debt?

As you can see below, at the end of June 2021, Neste Oyj had €1.40b of debt, up from €866.0m a year ago. Click the image for more detail. On the flip side, it has €1.32b in cash leading to net debt of about €78.0m.

debt-equity-history-analysis
HLSE:NESTE Debt to Equity History October 18th 2021

How Healthy Is Neste Oyj's Balance Sheet?

We can see from the most recent balance sheet that Neste Oyj had liabilities of €2.96b falling due within a year, and liabilities of €1.87b due beyond that. Offsetting these obligations, it had cash of €1.32b as well as receivables valued at €1.48b due within 12 months. So it has liabilities totalling €2.03b more than its cash and near-term receivables, combined.

Since publicly traded Neste Oyj shares are worth a very impressive total of €37.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Neste Oyj has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Neste Oyj has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.04 and EBIT of 36.6 times the interest expense. So relative to past earnings, the debt load seems trivial. But the bad news is that Neste Oyj has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Neste Oyj can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Neste Oyj produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Neste Oyj's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its EBIT growth rate. Looking at all the aforementioned factors together, it strikes us that Neste Oyj can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Neste Oyj's earnings per share history for free.

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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