Metsä Board Oyj (HEL:METSB) 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. As with many other companies Metsä Board Oyj (HEL:METSB) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Metsä Board Oyj

What Is Metsä Board Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Metsä Board Oyj had €432.0m of debt in June 2021, down from €461.5m, one year before. But on the other hand it also has €445.8m in cash, leading to a €13.8m net cash position.

A Look At Metsä Board Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that Metsä Board Oyj had liabilities of €442.9m due within 12 months and liabilities of €554.8m due beyond that. On the other hand, it had cash of €445.8m and €377.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €174.5m.

Of course, Metsä Board Oyj has a market capitalization of €3.27b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In addition to that, we're happy to report that Metsä Board Oyj has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. 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'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. While Metsä Board Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Metsä Board Oyj produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Metsä Board Oyj has €13.8m in net cash. And we liked the look of last year's 70% year-on-year EBIT growth. So we don't think Metsä Board Oyj's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Metsä Board Oyj (including 1 which is potentially serious) .

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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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.
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