Is PunaMusta Media Oyj (HEL:PUMU) Using Too Much 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 note that PunaMusta Media Oyj (HEL:PUMU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PunaMusta Media Oyj

What Is PunaMusta Media Oyj's Net Debt?

As you can see below, at the end of June 2022, PunaMusta Media Oyj had €25.7m of debt, up from €20.8m a year ago. Click the image for more detail. However, because it has a cash reserve of €18.0m, its net debt is less, at about €7.70m.

A Look At PunaMusta Media Oyj's Liabilities

The latest balance sheet data shows that PunaMusta Media Oyj had liabilities of €42.7m due within a year, and liabilities of €30.4m falling due after that. Offsetting these obligations, it had cash of €18.0m as well as receivables valued at €18.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €36.5m.

This deficit is considerable relative to its market capitalization of €48.3m, so it does suggest shareholders should keep an eye on PunaMusta Media Oyj's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, PunaMusta Media Oyj reported revenue of €119m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months PunaMusta Media Oyj produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €1.8m at the EBIT level. 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. Another cause for caution is that is bled €2.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for PunaMusta Media Oyj (of which 1 makes us a bit uncomfortable!) you should know about.

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.