Fodelia Oyj (HEL: FODELIA) has a somewhat strained record

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Fodelia Oyj (HEL: FODELIA) has a debt on its balance sheet. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest analysis for Fodelia Oyj

How much debt does Fodelia Oyj have?

You can click on the graph below for the historical figures, but it shows that as of December 2020, Fodelia Oyj had a debt of 8.04 million euros, an increase from 4.71 million euros , over one year. However, because it has a cash reserve of € 1.70 million, its net debt is lower, at around € 6.34 million.

HLSE: FODELIA History of debt on equity 23 May 2021

Is Fodelia Oyj’s track record healthy?

According to the last published balance sheet, Fodelia Oyj had liabilities of 6.27 million euros within 12 months and liabilities of 5.85 million euros due beyond 12 months. In return, he had € 1.70 million in cash and € 3.32 million in receivables due within 12 months. It therefore has a total liability of € 7.10 million more than its cash and short-term receivables combined.

Considering that Fodelia Oyj has a market cap of 52.7 million euros, it’s hard to believe that these liabilities pose a big threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.

We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Fodelia Oyj has a debt / EBITDA ratio of 4.5 and its EBIT covers its interest charges 2.9 times. This suggests that while debt levels are significant, we would stop calling them problematic. Worse yet, Fodelia Oyj has seen her EBIT reach 66% over the past 12 months. If the income continues like this for the long haul, there is an incredible chance to pay off that debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Fodelia Oyj’s ability to maintain a healthy balance sheet in the future. So if you want to see what the pros think about it, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, a business can only pay off its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Fodelia Oyj has recorded substantial negative free cash flow overall. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

Our point of view

To be frank, Fodelia Oyj’s EBIT conversion to free cash flow and its history of (not) growing its EBIT make us rather uncomfortable with its debt levels. That said, his ability to manage his total liabilities isn’t that much of a concern. We’re pretty clear that we consider Fodelia Oyj to be really quite risky, due to the health of her balance sheet. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 3 warning signs with Fodelia Oyj (at least 2 potentially serious) , and understanding them should be part of your investment process.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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