We Think Olvi Oyj (HEL:OLVAS) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Olvi Oyj (HEL:OLVAS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Olvi Oyj

What Is Olvi Oyj's Net Debt?

As you can see below, Olvi Oyj had €5.12m of debt at September 2022, down from €11.5m a year prior. But on the other hand it also has €46.6m in cash, leading to a €41.5m net cash position.

How Strong Is Olvi Oyj's Balance Sheet?

According to the last reported balance sheet, Olvi Oyj had liabilities of €199.5m due within 12 months, and liabilities of €20.2m due beyond 12 months. On the other hand, it had cash of €46.6m and €98.1m worth of receivables due within a year. So it has liabilities totalling €74.9m more than its cash and near-term receivables, combined.

Since publicly traded Olvi Oyj shares are worth a total of €676.7m, 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. While it does have liabilities worth noting, Olvi Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Olvi Oyj grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Olvi 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Olvi 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. During the last three years, Olvi Oyj generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Olvi Oyj does have more liabilities than liquid assets, it also has net cash of €41.5m. And it impressed us with free cash flow of €30m, being 81% of its EBIT. So we don't think Olvi Oyj's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Olvi Oyj's dividend history, without delay!

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. 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.