Would Meriaura Group Oyj (STO:MERIS) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Meriaura Group Oyj (STO:MERIS) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Meriaura Group Oyj

How Much Debt Does Meriaura Group Oyj Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Meriaura Group Oyj had €18.0m of debt, an increase on €242.8k, over one year. However, because it has a cash reserve of €3.81m, its net debt is less, at about €14.2m.

How Healthy Is Meriaura Group Oyj's Balance Sheet?

According to the last reported balance sheet, Meriaura Group Oyj had liabilities of €11.4m due within 12 months, and liabilities of €17.5m due beyond 12 months. On the other hand, it had cash of €3.81m and €5.81m worth of receivables due within a year. So its liabilities total €19.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Meriaura Group Oyj has a market capitalization of €55.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Meriaura Group 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.

Over 12 months, Meriaura Group Oyj reported revenue of €8.6m, which is a gain of 246%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Meriaura Group Oyj still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €4.3m 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 €6.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 Meriaura Group Oyj (including 1 which is a bit unpleasant) .

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.