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. We can see that Etteplan Oyj (HEL:ETTE) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Etteplan Oyj

How Much Debt Does Etteplan Oyj Carry?

As you can see below, Etteplan Oyj had €29.3m of debt at June 2019, down from €40.3m a year prior. On the flip side, it has €8.00m in cash leading to net debt of about €21.3m.

How Strong Is Etteplan Oyj's Balance Sheet?

We can see from the most recent balance sheet that Etteplan Oyj had liabilities of €73.7m falling due within a year, and liabilities of €32.0m due beyond that. Offsetting these obligations, it had cash of €8.00m as well as receivables valued at €32.9m due within 12 months. So its liabilities total €64.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Etteplan Oyj has a market capitalization of €223.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).