Finnair Oyj (HEL:FIA1S) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Finnair Oyj (HEL:FIA1S) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Finnair Oyj Carry?

As you can see below, Finnair Oyj had €880.9m of debt at December 2024, down from €919.4m a year prior. However, it does have €944.1m in cash offsetting this, leading to net cash of €63.2m.

A Look At Finnair Oyj's Liabilities

We can see from the most recent balance sheet that Finnair Oyj had liabilities of €1.40b falling due within a year, and liabilities of €1.70b due beyond that. Offsetting these obligations, it had cash of €944.1m as well as receivables valued at €186.5m due within 12 months. So it has liabilities totalling €1.96b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €753.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Finnair Oyj would probably need a major re-capitalization if its creditors were to demand repayment. Given that Finnair Oyj has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Check out our latest analysis for Finnair Oyj

Shareholders should be aware that Finnair Oyj's EBIT was down 44% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Finnair 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Finnair 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 last two years, Finnair Oyj actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Finnair Oyj does have more liabilities than liquid assets, it also has net cash of €63.2m. And it impressed us with free cash flow of €379m, being 140% of its EBIT. Despite its cash we think that Finnair Oyj seems to struggle to handle its total liabilities, so we are wary of the stock. 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 3 warning signs for Finnair Oyj that you should be aware of before investing here.

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.