Is Ponsse Oyj (HEL: PON1V) a risky investment?
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Ponsse Oyj (HEL: PON1V) uses debt. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. 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 review for Ponsse Oyj
What is Ponsse Oyj’s net debt?
The image below, which you can click for more details, shows that Ponsse Oyj had a debt of 54.2 million euros at the end of September 2021, compared to 161.8 million euros over one year. But he also has â¬ 75.5million in cash to make up for that, meaning he has â¬ 21.3million in net cash.
A look at the responsibilities of Ponsse Oyj
Zooming in on the latest balance sheet data, we can see that Ponsse Oyj had a liability of 147.0 million euros due within 12 months and a liability of 51.5 million euros due beyond. On the other hand, it had cash of â¬ 75.5 million and â¬ 69.2 million in receivables within one year. Its liabilities therefore amount to â¬ 53.8 million more than the combination of its cash and short-term receivables.
Considering that Ponsse Oyj has a market cap of 1.18 billion euros, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While he has some liabilities to note, Ponsse Oyj also has more cash than debt, so we’re pretty confident that he can handle his debt safely.
The good news is that Ponsse Oyj has increased its EBIT by 7.0% year over year, which should allay concerns about debt repayment. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine Ponsse Oyj’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Ponsse Oyj may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Ponsse Oyj has generated strong free cash flow equivalent to 67% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that Ponsse Oyj has â¬ 21.3 million in net cash. And he impressed us with free cash flow of 83 million euros, or 67% of his EBIT. We therefore do not believe that Ponsse Oyj’s use of debt is risky. Over time, stock prices tend to follow earnings per share, so if you are interested in Ponsse Oyj, you can click here to view an interactive graph of its historical earnings per share.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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