Is Finnair Oyj (HEL:FIA1S) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Finnair Oyj (HEL:FIA1S) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Finnair Oyj

What Is Finnair Oyj's Debt?

As you can see below, Finnair Oyj had €919.4m of debt at December 2023, down from €1.30b a year prior. However, it does have €924.2m in cash offsetting this, leading to net cash of €4.80m.

A Look At Finnair Oyj's Liabilities

According to the last reported balance sheet, Finnair Oyj had liabilities of €1.25b due within 12 months, and liabilities of €1.87b due beyond 12 months. On the other hand, it had cash of €924.2m and €224.4m worth of receivables due within a year. So it has liabilities totalling €1.97b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €601.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. Finnair Oyj boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We also note that Finnair Oyj improved its EBIT from a last year's loss to a positive €205m. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent year, Finnair Oyj recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Finnair Oyj does have more liabilities than liquid assets, it also has net cash of €4.80m. Despite the cash, we do find Finnair Oyj's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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. To that end, you should learn about the 4 warning signs we've spotted with Finnair Oyj (including 3 which are significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.