Is SRV Yhtiöt Oyj (HEL:SRV1V) Using Debt In A Risky Way?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SRV Yhtiöt Oyj (HEL:SRV1V) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for SRV Yhtiöt Oyj
What Is SRV Yhtiöt Oyj's Debt?
As you can see below, SRV Yhtiöt Oyj had €330.4m of debt at June 2019, down from €409.4m a year prior. On the flip side, it has €23.8m in cash leading to net debt of about €306.6m.
A Look At SRV Yhtiöt Oyj's Liabilities
Zooming in on the latest balance sheet data, we can see that SRV Yhtiöt Oyj had liabilities of €362.2m due within 12 months and liabilities of €455.7m due beyond that. Offsetting this, it had €23.8m in cash and €127.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €666.2m.
The deficiency here weighs heavily on the €77.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. After all, SRV Yhtiöt Oyj would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SRV Yhtiöt Oyj's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, SRV Yhtiöt Oyj made a loss at the EBIT level, and saw its revenue drop to €938m, which is a fall of 11%. We would much prefer see growth.
Caveat Emptor
While SRV Yhtiöt Oyj's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €17m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated €8.5m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it like an anti-vaccine zealot with an obvious case of measles. For riskier companies like SRV Yhtiöt Oyj I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
