Is Vaisala Oyj (HEL:VAIAS) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Vaisala Oyj (HEL:VAIAS) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Vaisala Oyj
What Is Vaisala Oyj's Net Debt?
As you can see below, Vaisala Oyj had €40.2m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. However, it does have €56.4m in cash offsetting this, leading to net cash of €16.2m.
A Look At Vaisala Oyj's Liabilities
The latest balance sheet data shows that Vaisala Oyj had liabilities of €139.9m due within a year, and liabilities of €23.3m falling due after that. Offsetting this, it had €56.4m in cash and €97.7m in receivables that were due within 12 months. So it has liabilities totalling €9.10m more than its cash and near-term receivables, combined.
Having regard to Vaisala Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €1.06b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Vaisala Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Vaisala Oyj grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vaisala Oyj can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vaisala Oyj may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Vaisala Oyj recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
We could understand if investors are concerned about Vaisala Oyj's liabilities, but we can be reassured by the fact it has has net cash of €16.2m. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in €14m. So is Vaisala Oyj's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Vaisala Oyj you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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.
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