Here's Why Outokumpu Oyj (HEL:OUT1V) Has A Meaningful Debt Burden

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Outokumpu Oyj (HEL:OUT1V) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Outokumpu Oyj

What Is Outokumpu Oyj's Debt?

The image below, which you can click on for greater detail, shows that Outokumpu Oyj had debt of €414.0m at the end of March 2024, a reduction from €547.0m over a year. However, it does have €425.0m in cash offsetting this, leading to net cash of €11.0m.

A Look At Outokumpu Oyj's Liabilities

According to the last reported balance sheet, Outokumpu Oyj had liabilities of €1.43b due within 12 months, and liabilities of €690.0m due beyond 12 months. Offsetting these obligations, it had cash of €425.0m as well as receivables valued at €613.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.09b.

This is a mountain of leverage relative to its market capitalization of €1.41b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Outokumpu Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Outokumpu Oyj's EBIT was down 99% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Outokumpu 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Outokumpu 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, Outokumpu Oyj produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Outokumpu Oyj's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €11.0m. And it impressed us with free cash flow of €94m, being 72% of its EBIT. So while Outokumpu Oyj does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Outokumpu Oyj is showing 1 warning sign in our investment analysis , 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.

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