Here's Why Bittium Oyj (HEL:BITTI) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Bittium Oyj (HEL:BITTI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bittium Oyj

What Is Bittium Oyj's Debt?

As you can see below, Bittium Oyj had €20.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €24.7m in cash, leading to a €4.66m net cash position.

How Healthy Is Bittium Oyj's Balance Sheet?

The latest balance sheet data shows that Bittium Oyj had liabilities of €21.8m due within a year, and liabilities of €21.9m falling due after that. Offsetting this, it had €24.7m in cash and €24.0m in receivables that were due within 12 months. So it actually has €4.90m more liquid assets than total liabilities.

This short term liquidity is a sign that Bittium Oyj could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Bittium Oyj has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Bittium Oyj if management cannot prevent a repeat of the 67% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bittium Oyj can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bittium 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, Bittium Oyj saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Bittium Oyj has €4.66m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Bittium Oyj's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Bittium Oyj that you should be aware of before investing here.

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. 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.
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