Metsä Board Oyj (HEL:METSB) has a fairly healthy balance sheet
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Metsa Board Oyj (HEL:METSB) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest review for Metsä Board Oyj
How much debt does Metsä Board Oyj have?
As you can see below, Metsä Board Oyj had €467.9 million in debt, as of March 2022, roughly the same as the previous year. You can click on the graph for more details. But on the other hand, it also has 565.0 million euros in cash, which leads to a net cash of 97.1 million euros.
A look at the responsibilities of Metsä Board Oyj
We can see from the most recent balance sheet that Metsä Board Oyj had liabilities of €685.5 million due in one year, and liabilities of €576.6 million due beyond. On the other hand, it has cash of €565.0 million and €435.2 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €261.9 million.
Of course, Metsä Board Oyj has a market capitalization of 2.80 billion euros, so these liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. Despite its notable liabilities, Metsä Board Oyj has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!
While Metsä Board Oyj doesn’t seem to have gained much on the EBIT line, at least earnings are holding steady for now. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Metsä Board Oyj’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Metsä Board Oyj has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) this cash balance. Over the past three years, Metsä Board Oyj has produced strong free cash flow equivalent to 60% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
While it is always a good idea to look at a company’s total liabilities, it is very reassuring to know that Metsä Board Oyj has 97.1 million euros in net cash. We are therefore not concerned about the use of Metsä Board Oyj’s debt. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Metsä Board Oyj has 3 warning signs (and 1 that shouldn’t be ignored) that we think you should know about.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.