Would Keskisuomalainen Oyj (HEL:KSLAV) Be Better Off With Less Debt?

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 Keskisuomalainen Oyj (HEL:KSLAV) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 Keskisuomalainen Oyj

How Much Debt Does Keskisuomalainen Oyj Carry?

The chart below, which you can click on for greater detail, shows that Keskisuomalainen Oyj had €56.8m in debt in June 2023; about the same as the year before. However, because it has a cash reserve of €24.9m, its net debt is less, at about €31.9m.

How Healthy Is Keskisuomalainen Oyj's Balance Sheet?

We can see from the most recent balance sheet that Keskisuomalainen Oyj had liabilities of €64.4m falling due within a year, and liabilities of €52.1m due beyond that. Offsetting these obligations, it had cash of €24.9m as well as receivables valued at €20.5m due within 12 months. So it has liabilities totalling €71.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €95.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Keskisuomalainen Oyj will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Keskisuomalainen Oyj had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to €203m. We would much prefer see growth.

Caveat Emptor

Importantly, Keskisuomalainen Oyj had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €13m. 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. We would feel better if it turned its trailing twelve month loss of €4.1m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Keskisuomalainen Oyj you should know about.

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.