Health Check: How Prudently Does Modulight Oyj (HEL:MODU) Use Debt?

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.' 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. Importantly, Modulight Oyj (HEL:MODU) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Modulight Oyj

How Much Debt Does Modulight Oyj Carry?

The image below, which you can click on for greater detail, shows that Modulight Oyj had debt of €5.01m at the end of September 2024, a reduction from €6.55m over a year. However, its balance sheet shows it holds €18.5m in cash, so it actually has €13.5m net cash.

A Look At Modulight Oyj's Liabilities

We can see from the most recent balance sheet that Modulight Oyj had liabilities of €4.44m falling due within a year, and liabilities of €3.01m due beyond that. On the other hand, it had cash of €18.5m and €905.0k worth of receivables due within a year. So it can boast €12.0m more liquid assets than total liabilities.

This excess liquidity suggests that Modulight Oyj is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Modulight Oyj boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Modulight 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.

In the last year Modulight Oyj had a loss before interest and tax, and actually shrunk its revenue by 19%, to €6.5m. That's not what we would hope to see.

So How Risky Is Modulight Oyj?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Modulight Oyj had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €13m and booked a €11m accounting loss. However, it has net cash of €13.5m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Modulight Oyj you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.