Here's Why Vaisala Oyj (HEL:VAIAS) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Vaisala Oyj (HEL:VAIAS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vaisala Oyj

What Is Vaisala Oyj's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Vaisala Oyj had debt of €52.5m, up from €40.1m in one year. However, its balance sheet shows it holds €55.5m in cash, so it actually has €3.00m net cash.

How Healthy Is Vaisala Oyj's Balance Sheet?

We can see from the most recent balance sheet that Vaisala Oyj had liabilities of €170.8m falling due within a year, and liabilities of €17.7m due beyond that. Offsetting these obligations, it had cash of €55.5m as well as receivables valued at €122.9m due within 12 months. So its liabilities total €10.1m more than the combination of its cash and short-term receivables.

Having regard to Vaisala Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €1.56b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Vaisala Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Vaisala Oyj grew its EBIT by 14% last year, making its debt load easier to handle. 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 Vaisala 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. Vaisala 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. Over the most recent three years, Vaisala Oyj recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Vaisala Oyj's liabilities, but we can be reassured by the fact it has has net cash of €3.00m. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't think Vaisala Oyj's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Vaisala Oyj, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.