Here's Why UPM-Kymmene Oyj (HEL:UPM) Can Manage Its Debt Responsibly

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 UPM-Kymmene Oyj (HEL:UPM) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for UPM-Kymmene Oyj

What Is UPM-Kymmene Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 UPM-Kymmene Oyj had debt of €2.16b, up from €1.33b in one year. But it also has €2.37b in cash to offset that, meaning it has €208.0m net cash.

A Look At UPM-Kymmene Oyj's Liabilities

We can see from the most recent balance sheet that UPM-Kymmene Oyj had liabilities of €2.48b falling due within a year, and liabilities of €4.16b due beyond that. On the other hand, it had cash of €2.37b and €1.74b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.54b.

Of course, UPM-Kymmene Oyj has a titanic market capitalization of €17.5b, 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. Despite its noteworthy liabilities, UPM-Kymmene Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact UPM-Kymmene Oyj's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine UPM-Kymmene 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. UPM-Kymmene 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, UPM-Kymmene Oyj produced sturdy free cash flow equating to 67% 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 UPM-Kymmene 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 €208.0m. And it impressed us with free cash flow of €122m, being 67% of its EBIT. So we are not troubled with UPM-Kymmene Oyj's debt use. 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. For instance, we've identified 1 warning sign for UPM-Kymmene Oyj that you should be aware of.

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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