Health Check: How Prudently Does PunaMusta Media Oyj (HEL:PUMU) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 PunaMusta Media Oyj (HEL:PUMU) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for PunaMusta Media Oyj

What Is PunaMusta Media Oyj's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 PunaMusta Media Oyj had debt of €29.2m, up from €25.7m in one year. However, it also had €14.6m in cash, and so its net debt is €14.6m.

How Strong Is PunaMusta Media Oyj's Balance Sheet?

We can see from the most recent balance sheet that PunaMusta Media Oyj had liabilities of €42.5m falling due within a year, and liabilities of €34.6m due beyond that. Offsetting these obligations, it had cash of €14.6m as well as receivables valued at €16.4m due within 12 months. So its liabilities total €46.1m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €42.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 PunaMusta Media Oyj's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year PunaMusta Media Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to €141m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, PunaMusta Media Oyj had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €3.2m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €5.6m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with PunaMusta Media Oyj .

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.