Revenio Group Oyj (HEL:REG1V) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Revenio Group Oyj (HEL:REG1V) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Revenio Group Oyj

What Is Revenio Group Oyj's Debt?

As you can see below, Revenio Group Oyj had €20.3m of debt at September 2022, down from €24.5m a year prior. However, it does have €22.3m in cash offsetting this, leading to net cash of €2.00m.

A Look At Revenio Group Oyj's Liabilities

According to the last reported balance sheet, Revenio Group Oyj had liabilities of €21.2m due within 12 months, and liabilities of €20.4m due beyond 12 months. Offsetting this, it had €22.3m in cash and €13.7m in receivables that were due within 12 months. So its liabilities total €5.60m more than the combination of its cash and short-term receivables.

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 while it's hard to imagine that the €992.5m company is struggling for cash, we still think it's worth monitoring its 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.

Also positive, Revenio Group Oyj grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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 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. Over the most recent three years, Revenio Group Oyj recorded free cash flow worth 74% 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.

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 €2.00m. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in €19m. So we don't think Revenio Group Oyj's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Revenio Group Oyj's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.