Does Metsä Board Oyj (HEL:METSB) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Metsä Board Oyj (HEL:METSB) makes use of debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Metsä Board Oyj

What Is Metsä Board Oyj's Debt?

The chart below, which you can click on for greater detail, shows that Metsä Board Oyj had €443.5m in debt in March 2021; about the same as the year before. However, its balance sheet shows it holds €467.8m in cash, so it actually has €24.3m net cash.

How Strong Is Metsä Board Oyj's Balance Sheet?

According to the last reported balance sheet, Metsä Board Oyj had liabilities of €482.2m due within 12 months, and liabilities of €556.0m due beyond 12 months. On the other hand, it had cash of €467.8m and €347.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €223.4m.

Since publicly traded Metsä Board Oyj shares are worth a total of €3.59b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Metsä Board Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Metsä Board Oyj grew its EBIT by 106% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Metsä Board 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Metsä Board 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, Metsä Board Oyj produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Metsä Board Oyj's liabilities, but we can be reassured by the fact it has has net cash of €24.3m. And we liked the look of last year's 106% year-on-year EBIT growth. So is Metsä Board 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Metsä Board Oyj (at least 1 which is significant) , 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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