Is Revenio Group Oyj (HEL:REG1V) Using Too Much 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. As with many other companies Revenio Group Oyj (HEL:REG1V) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Revenio Group Oyj

What Is Revenio Group Oyj's Net Debt?

As you can see below, Revenio Group Oyj had €16.0m of debt at September 2023, down from €20.3m a year prior. However, its balance sheet shows it holds €19.3m in cash, so it actually has €3.30m net cash.

A Look At Revenio Group Oyj's Liabilities

We can see from the most recent balance sheet that Revenio Group Oyj had liabilities of €18.5m falling due within a year, and liabilities of €17.0m due beyond that. Offsetting these obligations, it had cash of €19.3m as well as receivables valued at €10.8m due within 12 months. So it has liabilities totalling €5.40m more than its cash and near-term receivables, combined.

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 €743.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Revenio Group Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Revenio Group Oyj saw its EBIT decline by 6.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Revenio Group 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 most recent three years, Revenio Group Oyj recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Revenio Group Oyj's liabilities, but we can be reassured by the fact it has has net cash of €3.30m. So we don't think Revenio Group Oyj's use of debt is risky. 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 1 warning sign with Revenio Group Oyj , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.