Siili Solutions Oyj (HEL:SIILI) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Siili Solutions Oyj (HEL:SIILI) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Siili Solutions Oyj

What Is Siili Solutions Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Siili Solutions Oyj had €11.2m of debt in December 2020, down from €12.2m, one year before. However, it does have €21.7m in cash offsetting this, leading to net cash of €10.4m.

How Strong Is Siili Solutions Oyj's Balance Sheet?

We can see from the most recent balance sheet that Siili Solutions Oyj had liabilities of €26.5m falling due within a year, and liabilities of €13.2m due beyond that. Offsetting these obligations, it had cash of €21.7m as well as receivables valued at €11.8m due within 12 months. So it has liabilities totalling €6.33m more than its cash and near-term receivables, combined.

Since publicly traded Siili Solutions Oyj shares are worth a total of €116.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

In addition to that, we're happy to report that Siili Solutions Oyj has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Siili Solutions 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. 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 €10.4m in net cash. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in €10m. So we don't think Siili Solutions Oyj's use of debt is risky. 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. For instance, we've identified 3 warning signs for Siili Solutions Oyj that you should be aware of.

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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