Nokia Oyj (HEL:NOKIA) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Nokia Oyj (HEL:NOKIA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nokia Oyj

What Is Nokia Oyj's Debt?

The image below, which you can click on for greater detail, shows that Nokia Oyj had debt of €4.14b at the end of September 2023, a reduction from €4.60b over a year. However, it does have €6.30b in cash offsetting this, leading to net cash of €2.17b.

How Healthy Is Nokia Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nokia Oyj had liabilities of €11.1b due within 12 months and liabilities of €8.05b due beyond that. Offsetting this, it had €6.30b in cash and €8.19b in receivables that were due within 12 months. So it has liabilities totalling €4.70b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Nokia Oyj has a huge market capitalization of €17.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Nokia Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Nokia Oyj grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nokia 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nokia 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, Nokia Oyj recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Nokia Oyj's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €2.17b. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't have any problem with Nokia Oyj's use of debt. 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 3 warning signs for Nokia Oyj (2 make us uncomfortable!) 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.