Remedy Entertainment Oyj (HEL:REMEDY) Has A Pretty Healthy Balance Sheet

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. We can see that Remedy Entertainment Oyj (HEL:REMEDY) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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

See our latest analysis for Remedy Entertainment Oyj

What Is Remedy Entertainment Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Remedy Entertainment Oyj had €2.76m of debt in December 2021, down from €3.67m, one year before. However, it does have €55.4m in cash offsetting this, leading to net cash of €52.6m.

A Look At Remedy Entertainment Oyj's Liabilities

We can see from the most recent balance sheet that Remedy Entertainment Oyj had liabilities of €10.7m falling due within a year, and liabilities of €1.84m due beyond that. Offsetting these obligations, it had cash of €55.4m as well as receivables valued at €18.2m due within 12 months. So it actually has €61.0m more liquid assets than total liabilities.

This surplus suggests that Remedy Entertainment Oyj is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Remedy Entertainment Oyj has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Remedy Entertainment Oyj grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Remedy Entertainment 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Remedy Entertainment Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Remedy Entertainment Oyj basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing up

While it is always sensible to investigate a company's debt, in this case Remedy Entertainment Oyj has €52.6m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Remedy Entertainment 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Remedy Entertainment Oyj (of which 1 is a bit unpleasant!) 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.