Is Incap Oyj (HEL:ICP1V) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Incap Oyj (HEL:ICP1V) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Incap Oyj

What Is Incap Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that Incap Oyj had debt of €24.3m at the end of September 2024, a reduction from €25.8m over a year. However, its balance sheet shows it holds €42.2m in cash, so it actually has €17.9m net cash.

A Look At Incap Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that Incap Oyj had liabilities of €43.9m due within 12 months and liabilities of €31.7m due beyond that. Offsetting these obligations, it had cash of €42.2m as well as receivables valued at €46.6m due within 12 months. So it can boast €13.2m more liquid assets than total liabilities.

This surplus suggests that Incap Oyj has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Incap Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Incap Oyj's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Incap Oyj can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Incap 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. Looking at the most recent three years, Incap Oyj recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Incap Oyj has €17.9m in net cash and a decent-looking balance sheet. So we are not troubled with Incap Oyj's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Incap Oyj, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.