Is Modulight Oyj (HEL:MODU) Using Debt In A Risky Way?

Warren Buffett famously said, '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. As with many other companies Modulight Oyj (HEL:MODU) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Modulight Oyj

What Is Modulight Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Modulight Oyj had €6.01m of debt in March 2024, down from €8.28m, one year before. But on the other hand it also has €22.5m in cash, leading to a €16.4m net cash position.

How Healthy Is Modulight Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Modulight Oyj had liabilities of €4.07m due within 12 months and liabilities of €4.01m due beyond that. Offsetting these obligations, it had cash of €22.5m as well as receivables valued at €2.04m due within 12 months. So it can boast €16.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Modulight Oyj's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

Over 12 months, Modulight Oyj made a loss at the EBIT level, and saw its revenue drop to €6.9m, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Modulight Oyj?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Modulight Oyj had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €19m of cash and made a loss of €12m. But at least it has €16.4m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 3 warning signs with Modulight Oyj (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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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.