These 4 measures indicate that Piippo Oyj (HEL: PIIPPO) is using his debt reasonably well
Howard Marks put 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 every investor practice that I know is worried. ” 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 can see that Piippo Oyj (HEL: PIIPPO) uses debt in his business. But does this debt concern shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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 in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Piippo Oyj
What is Piippo Oyj’s debt?
As you can see below, Piippo Oyj had € 3.08 million in debt in June 2021, up from € 8.74 million the year before. However, he also had € 304.1K in cash, and therefore his net debt is € 2.78M.
A look at Piippo Oyj’s responsibilities
The latest balance sheet data shows Piippo Oyj had debts of € 7.10 million maturing within one year, and debts of € 3.08 million maturing thereafter. On the other hand, it had cash of € 304.1K and € 4.85M in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 5.03 million.
When you consider that this deficit exceeds the company’s market capitalization of 4.19 million euros, you might be inclined to carefully review the balance sheet. Hypothetically, an extremely large dilution would be required if the company was forced to repay its debts by raising capital at the current share price.
We use two main ratios to inform us about the levels of debt compared to earnings. 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.
Piippo Oyj has net debt of 2.2 times EBITDA, which isn’t too much, but his interest coverage looks a bit weak, with EBIT at just 3.2 times interest expense. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. It should be noted that Piippo Oyj’s EBIT has soared like bamboo after the rain, gaining 99% in the past twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Piippo Oyj’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only repay 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 two years, Piippo Oyj has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
Piippo Oyj’s ability to convert EBIT into free cash flow and its EBIT growth rate have supported us in its ability to manage its debt. But the truth is, his total passive level made us bite our nails. Looking at all of this data, we feel a little cautious about Piippo Oyj’s debt levels. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. 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. To this end, you should inquire about the 3 warning signs we spotted it with Piippo Oyj (including 2 that make us uncomfortable).
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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 documents. Simply Wall St has no position in the mentioned stocks.
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