These 4 metrics indicate that Sanoma Oyj (HEL: SANOMA) is using debt reasonably well
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Sanoma Oyj (HEL: SANOMA) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. 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 painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth 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.
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What is Sanoma Oyj’s debt?
The graph below, which you can click on for more details, shows that Sanoma Oyj had a debt of €660.6 million in June 2022; about the same as the previous year. However, because it has a cash reserve of €46.2 million, its net debt is lower, at around €614.4 million.
A look at the responsibilities of Sanoma Oyj
According to the latest published balance sheet, Sanoma Oyj had liabilities of €739.7 million maturing within 12 months and liabilities of €664.6 million maturing beyond 12 months. On the other hand, it has cash of €46.2 million and €240.1 million in receivables at less than one year. It therefore has liabilities totaling 1.12 billion euros more than its cash and short-term receivables, combined.
This shortfall is not that bad as Sanoma Oyj is worth €2.00 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
We would say that Sanoma Oyj’s moderate net debt to EBITDA ratio (2.5) indicates prudence in terms of leverage. And its strong interest coverage of 16.0 times makes us even more comfortable. If Sanoma Oyj can continue to grow EBIT at last year’s 11% rate compared to last year, then it will find its debt more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Sanoma Oyj can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Sanoma Oyj has generated free cash flow of a very strong 89% of its EBIT, more than expected. This positions him well to pay off debt if desired.
Our point of view
Sanoma Oyj’s interest cover suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we’re a bit concerned about his total passive level. All in all, it looks like Sanoma Oyj can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. 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, we found 3 warning signs for Sanoma Oyj which you should be aware of before investing here.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.
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