Apetit Oyj (HEL:APETIT) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Apetit Oyj (HEL:APETIT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Apetit Oyj

What Is Apetit Oyj's Net Debt?

As you can see below, at the end of June 2020, Apetit Oyj had €17.9m of debt, up from €4.90m a year ago. Click the image for more detail. But it also has €26.4m in cash to offset that, meaning it has €8.50m net cash.

How Strong Is Apetit Oyj's Balance Sheet?

We can see from the most recent balance sheet that Apetit Oyj had liabilities of €36.1m falling due within a year, and liabilities of €5.20m due beyond that. Offsetting this, it had €26.4m in cash and €6.70m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.20m.

Given Apetit Oyj has a market capitalization of €63.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Apetit Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Apetit Oyj grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Apetit 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Apetit Oyj may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Apetit Oyj saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Apetit Oyj does have more liabilities than liquid assets, it also has net cash of €8.50m. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't have any problem with Apetit Oyj's use of debt. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Apetit Oyj , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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