Aspocomp Group Oyj (HEL:ACG1V) Seems To Use Debt Quite Sensibly

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 Aspocomp Group Oyj (HEL:ACG1V) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Aspocomp Group Oyj

What Is Aspocomp Group Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that Aspocomp Group Oyj had debt of €2.83m at the end of March 2023, a reduction from €4.07m over a year. However, it also had €2.35m in cash, and so its net debt is €479.0k.

A Look At Aspocomp Group Oyj's Liabilities

According to the last reported balance sheet, Aspocomp Group Oyj had liabilities of €6.16m due within 12 months, and liabilities of €2.06m due beyond 12 months. Offsetting these obligations, it had cash of €2.35m as well as receivables valued at €8.05m due within 12 months. So it can boast €2.17m more liquid assets than total liabilities.

This surplus suggests that Aspocomp Group Oyj has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Aspocomp Group Oyj has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Aspocomp Group Oyj has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.083 and EBIT of 42.6 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. Also good is that Aspocomp Group Oyj grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 Aspocomp Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last two years, Aspocomp Group Oyj's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Aspocomp Group Oyj's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Zooming out, Aspocomp Group Oyj seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. For example, we've discovered 2 warning signs for Aspocomp Group Oyj that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.