Here's Why Meriaura Group Oyj (STO:MERIS) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Meriaura Group Oyj (STO:MERIS) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Meriaura Group Oyj

How Much Debt Does Meriaura Group Oyj Carry?

As you can see below, at the end of June 2023, Meriaura Group Oyj had €16.3m of debt, up from €243.0k a year ago. Click the image for more detail. However, it does have €4.25m in cash offsetting this, leading to net debt of about €12.0m.

How Healthy Is Meriaura Group Oyj's Balance Sheet?

We can see from the most recent balance sheet that Meriaura Group Oyj had liabilities of €10.1m falling due within a year, and liabilities of €16.5m due beyond that. Offsetting these obligations, it had cash of €4.25m as well as receivables valued at €3.30m due within 12 months. So its liabilities total €19.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Meriaura Group Oyj is worth €36.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Meriaura Group 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.

In the last year Meriaura Group Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 1,165%, to €38m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Meriaura Group Oyj managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost €1.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €3.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. We've identified 3 warning signs with Meriaura Group Oyj (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.