We Think Admicom Oyj (HEL:ADMCM) Can Manage Its Debt With Ease

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Admicom Oyj (HEL:ADMCM) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Admicom Oyj

How Much Debt Does Admicom Oyj Carry?

As you can see below, Admicom Oyj had €4.09m of debt at June 2023, down from €13.1m a year prior. But on the other hand it also has €5.25m in cash, leading to a €1.16m net cash position.

How Healthy Is Admicom Oyj's Balance Sheet?

The latest balance sheet data shows that Admicom Oyj had liabilities of €7.38m due within a year, and liabilities of €4.58m falling due after that. Offsetting these obligations, it had cash of €5.25m as well as receivables valued at €3.64m due within 12 months. So it has liabilities totalling €3.07m more than its cash and near-term receivables, combined.

Having regard to Admicom Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €183.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Admicom Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Admicom Oyj grew its EBIT by 2.5% in the last year, making that debt load look even more manageable. 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 Admicom 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 Admicom 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. Over the last three years, Admicom Oyj recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Admicom Oyj has €1.16m in net cash. And it impressed us with free cash flow of €11m, being 88% of its EBIT. So is Admicom Oyj's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Admicom Oyj you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.