Vaisala Oyj (HEL:VAIAS) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. Importantly, Vaisala Oyj (HEL:VAIAS) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vaisala Oyj

What Is Vaisala Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Vaisala Oyj had €50.0m of debt in June 2023, down from €65.0m, one year before. However, its balance sheet shows it holds €51.2m in cash, so it actually has €1.20m net cash.

How Healthy Is Vaisala Oyj's Balance Sheet?

According to the last reported balance sheet, Vaisala Oyj had liabilities of €108.6m due within 12 months, and liabilities of €71.3m due beyond 12 months. On the other hand, it had cash of €51.2m and €111.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €17.0m.

This state of affairs indicates that Vaisala Oyj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.34b company is struggling for cash, we still think it's worth monitoring its 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.

But the other side of the story is that Vaisala Oyj saw its EBIT decline by 6.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vaisala 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.

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 75% 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 €1.20m. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in €52m. So we don't think Vaisala Oyj's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Vaisala Oyj you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.