We Think Metsä Board Oyj (HEL:METSB) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Metsä Board Oyj (HEL:METSB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Metsä Board Oyj

What Is Metsä Board Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Metsä Board Oyj had debt of €507.8m, up from €444.0m in one year. However, because it has a cash reserve of €160.1m, its net debt is less, at about €347.7m.

A Look At Metsä Board Oyj's Liabilities

We can see from the most recent balance sheet that Metsä Board Oyj had liabilities of €504.6m falling due within a year, and liabilities of €550.2m due beyond that. Offsetting these obligations, it had cash of €160.1m as well as receivables valued at €351.3m due within 12 months. So it has liabilities totalling €543.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Metsä Board Oyj has a market capitalization of €1.59b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Metsä Board 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.

Over 12 months, Metsä Board Oyj made a loss at the EBIT level, and saw its revenue drop to €1.9b, which is a fall of 9.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Metsä Board Oyj produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €34m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €42m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for Metsä Board Oyj you should be aware of, and 1 of them is significant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.