David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Revenio Group Oyj (HEL:REG1V) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, 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.
How Much Debt Does Revenio Group Oyj Carry?
The image below, which you can click on for greater detail, shows that Revenio Group Oyj had debt of €23.5m at the end of December 2021, a reduction from €26.3m over a year. However, it does have €25.2m in cash offsetting this, leading to net cash of €1.70m.
How Healthy Is Revenio Group Oyj's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Revenio Group Oyj had liabilities of €40.9m due within 12 months and liabilities of €5.30m due beyond that. On the other hand, it had cash of €25.2m and €9.20m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.8m.
This state of affairs indicates that Revenio Group Oyj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €1.12b 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.
Another good sign is that Revenio Group Oyj has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Revenio Group Oyj generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Revenio Group Oyj has €1.70m in net cash. And it impressed us with free cash flow of €19m, being 84% of its EBIT. So is Revenio Group Oyj's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Revenio Group Oyj you should know about.
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.