Is Siili Solutions Oyj (HEL:SIILI) A Risky Investment?

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. As with many other companies Siili Solutions Oyj (HEL:SIILI) makes use of debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Siili Solutions Oyj

How Much Debt Does Siili Solutions Oyj Carry?

As you can see below, Siili Solutions Oyj had €28.0m of debt, at June 2023, 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 €29.0m in cash, leading to a €971.0k net cash position.

How Strong Is Siili Solutions Oyj's Balance Sheet?

According to the last reported balance sheet, Siili Solutions Oyj had liabilities of €30.7m due within 12 months, and liabilities of €28.9m due beyond 12 months. On the other hand, it had cash of €29.0m and €23.5m worth of receivables due within a year. So it has liabilities totalling €7.07m more than its cash and near-term receivables, combined.

Given Siili Solutions Oyj has a market capitalization of €71.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Siili Solutions Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Siili Solutions Oyj has seen its EBIT plunge 16% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Siili Solutions 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Siili Solutions Oyj may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Siili Solutions Oyj actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Siili Solutions Oyj has €971.0k in net cash. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in €9.2m. So we don't have any problem with Siili Solutions Oyj's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Siili Solutions Oyj .

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.