Is Sanoma Oyj (HEL: SAA1V) Using Too Much Debt?

Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Sanoma Oyj (HEL: SAA1V) uses debt in his business. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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 step in examining a business’s debt levels is to consider its cash flow and debt together.

Check out our latest analysis for Sanoma Oyj

What is Sanoma Oyj’s debt?

The image below, which you can click for more details, shows that in September 2021, Sanoma Oyj had a debt of 515.4 million euros, compared to 212.1 million euros in one year. On the other hand, it has 57.8 million euros in cash, leading to a net debt of approximately 457.6 million euros.

A look at the responsibilities of Sanoma Oyj

According to the latest published balance sheet, Sanoma Oyj had liabilities of 605.8 million euros less than 12 months and liabilities of 762.7 million euros over 12 months. On the other hand, it had cash of € 57.8 million and € 286.0 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 1.02 billion euros.

Sanoma Oyj has a market cap of 2.18 billion euros, so she could most likely raise funds to improve her balance sheet if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

We would say that Sanoma Oyj’s moderate net debt to EBITDA ratio (being 1.7) indicates leverage conservatism. And its strong coverage interest of 14.3 times, makes us even more comfortable. On top of that, Sanoma Oyj has increased its EBIT by 50% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Sanoma 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 needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Fortunately for all shareholders, Sanoma Oyj has actually generated more free cash flow than EBIT over the past three years. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.

Our point of view

Fortunately, Sanoma Oyj’s impressive interest coverage means she has the upper hand on her debt. But, on a darker note, we’re a little concerned with its total liability level. Zooming out, Sanoma Oyj seems to be using the debt in a very reasonable way; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a better return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 4 warning signs with Sanoma Oyj and understanding them should be part of your investment process.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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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 any stock 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 any of the stocks mentioned.