These 4 measures indicate that Harvia Oyj (HEL: HARVIA) is using her debts safely
David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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. Like many other companies Harvia Oyj (HEL: HARVIA) uses the debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. By replacing dilution, however, debt can be a very good 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 uses is to look at its cash flow and debt together.
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How much debt does Harvia Oyj have?
As you can see below, Harvia Oyj had € 57.5 million in debt in June 2021, up from € 67.1 million the year before. However, he also had 21.4 million euros in cash, so his net debt is 36.1 million euros.
How healthy is Harvia Oyj’s record?
According to the latest published balance sheet, Harvia Oyj had liabilities of 33.5 million euros within 12 months and liabilities of 83.5 million euros due beyond 12 months. On the other hand, it had cash of € 21.4 million and € 23.9 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 71.7 million.
Considering that the listed Harvia Oyj shares are worth a total of 879.2 million euros, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Harvia Oyj’s net debt is only 0.84 times her EBITDA. And its EBIT covers its interest costs 33.8 times more. So we’re pretty relaxed about its ultra-conservative use of debt. Even more impressive, Harvia Oyj increased her EBIT by 141% year over year. If sustained, this growth will make debt even more manageable in the years to come. 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 Harvia 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 business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Harvia Oyj has recorded free cash flow of 77% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Harvia Oyj’s demonstrated ability to cover her interest costs with her EBIT delights us like a fluffy puppy does a toddler. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Considering this range of factors, it seems to us that Harvia Oyj is quite cautious with her debt, and the risks seem well under control. The balance sheet therefore seems rather healthy to us. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Harvia Oyj you should know.
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 net growth stocks.
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 any of the stocks mentioned.
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