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. 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. We can see that PunaMusta Media Oyj (HEL:PUMU) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for PunaMusta Media Oyj
What Is PunaMusta Media Oyj's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 PunaMusta Media Oyj had debt of €13.5m, up from €4.30m in one year. However, it does have €19.0m in cash offsetting this, leading to net cash of €5.50m.
How Strong Is PunaMusta Media Oyj's Balance Sheet?
According to the last reported balance sheet, PunaMusta Media Oyj had liabilities of €30.7m due within 12 months, and liabilities of €17.1m due beyond 12 months. Offsetting this, it had €19.0m in cash and €12.3m in receivables that were due within 12 months. So its liabilities total €16.5m more than the combination of its cash and short-term receivables.
PunaMusta Media Oyj has a market capitalization of €77.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, PunaMusta Media Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, PunaMusta Media Oyj's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PunaMusta Media 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.