Is Stora Enso Oyj (HEL:STERV) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Stora Enso Oyj (HEL:STERV) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Stora Enso Oyj

What Is Stora Enso Oyj's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Stora Enso Oyj had debt of €4.86b, up from €3.83b in one year. On the flip side, it has €2.10b in cash leading to net debt of about €2.76b.

How Strong Is Stora Enso Oyj's Balance Sheet?

The latest balance sheet data shows that Stora Enso Oyj had liabilities of €3.66b due within a year, and liabilities of €5.97b falling due after that. Offsetting this, it had €2.10b in cash and €1.21b in receivables that were due within 12 months. So its liabilities total €6.32b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Stora Enso Oyj has a huge market capitalization of €10.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Stora Enso 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.

Over 12 months, Stora Enso Oyj made a loss at the EBIT level, and saw its revenue drop to €8.8b, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Stora Enso Oyj's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €82m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €341m of cash over the last year. So to be blunt we think it is risky. For riskier companies like Stora Enso Oyj I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.