Auditors Have Doubts About Stockmann Oyj Abp (HEL:STOCKA)

Unfortunately for shareholders, when Stockmann Oyj Abp (HEL:STOCKA) reported results for the period to December 2021, its auditors, Ernst & Young LLP, expressed uncertainty about whether it can continue as a going concern. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.

If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. Debt is always a risk factor in these cases, as creditors could be in a position to wind up the company, in the worst case scenario.

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 Stockmann Oyj Abp had €447.5m of debt in December 2021, down from €488.2m, one year before. However, it does have €213.7m in cash offsetting this, leading to net debt of about €233.8m.

How Strong Is Stockmann Oyj Abp's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Stockmann Oyj Abp had liabilities of €739.6m due within 12 months and liabilities of €408.7m due beyond that. Offsetting these obligations, it had cash of €213.7m as well as receivables valued at €20.1m due within 12 months. So it has liabilities totalling €914.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €246.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Stockmann Oyj Abp would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Stockmann Oyj Abp's debt is 2.9 times its EBITDA, and its EBIT cover its interest expense 2.9 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. One redeeming factor for Stockmann Oyj Abp is that it turned last year's EBIT loss into a gain of €53m, over the last twelve months. 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 Stockmann Oyj Abp 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Stockmann Oyj Abp actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

We'd go so far as to say Stockmann Oyj Abp's level of total liabilities was disappointing. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Once we consider all the factors above, together, it seems to us that Stockmann Oyj Abp's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. Some investors may be interested in buying high risk stocks at the right price, but we prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. We prefer to invest in companies that ensure the balance sheet remains healthier than that. 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. Case in point: We've spotted 4 warning signs for Stockmann Oyj Abp you should be aware of, and 2 of them are a bit unpleasant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.