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 Revenio Group Oyj (HEL:REG1V) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Revenio Group Oyj's Net Debt?
As you can see below, Revenio Group Oyj had €26.0m of debt at June 2021, down from €28.8m a year prior. On the flip side, it has €12.1m in cash leading to net debt of about €13.9m.
How Healthy Is Revenio Group Oyj's Balance Sheet?
According to the last reported balance sheet, Revenio Group Oyj had liabilities of €14.9m due within 12 months, and liabilities of €26.7m due beyond 12 months. Offsetting these obligations, it had cash of €12.1m as well as receivables valued at €8.40m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €21.1m.
Having regard to Revenio Group Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €1.67b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Revenio Group Oyj has a very light debt load indeed.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Revenio Group Oyj has a low net debt to EBITDA ratio of only 0.60. And its EBIT easily covers its interest expense, being 158 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Revenio Group Oyj grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Revenio Group 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Revenio Group Oyj recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Revenio Group Oyj's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its EBIT growth rate also supports that impression! We would also note that Medical Equipment industry companies like Revenio Group Oyj commonly do use debt without problems. It looks Revenio Group Oyj has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. Over time, share prices tend to follow earnings per share, so if you're interested in Revenio Group Oyj, you may well want to click here to check an interactive graph of its earnings per share history.
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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