Stockmann Oyj Abp (HEL:STCBV) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Stockmann Oyj Abp (HEL:STCBV) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Stockmann Oyj Abp

What Is Stockmann Oyj Abp's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Stockmann Oyj Abp had €478.8m of debt, an increase on €447.5m, over one year. However, it also had €125.5m in cash, and so its net debt is €353.3m.

How Strong Is Stockmann Oyj Abp's Balance Sheet?

According to the last reported balance sheet, Stockmann Oyj Abp had liabilities of €839.2m due within 12 months, and liabilities of €527.2m due beyond 12 months. Offsetting this, it had €125.5m in cash and €26.6m in receivables that were due within 12 months. So it has liabilities totalling €1.21b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €67.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Stockmann Oyj Abp would probably need a major re-capitalization if its creditors were to demand repayment. 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 Stockmann Oyj Abp'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 Stockmann Oyj Abp had a loss before interest and tax, and actually shrunk its revenue by 13%, to €862m. That's not what we would hope to see.

Caveat Emptor

While Stockmann Oyj Abp's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €14m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost €75m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Stockmann Oyj Abp , and understanding them should be part of your investment process.

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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