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Warren Buffett famously said, '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. Importantly, Tokmanni Group Oyj (HEL:TOKMAN) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Tokmanni Group Oyj's Net Debt?
The image below, which you can click on for greater detail, shows that Tokmanni Group Oyj had debt of €119.0m at the end of June 2019, a reduction from €182.2m over a year. However, it also had €5.80m in cash, and so its net debt is €113.2m.
A Look At Tokmanni Group Oyj's Liabilities
According to the last reported balance sheet, Tokmanni Group Oyj had liabilities of €196.2m due within 12 months, and liabilities of €375.1m due beyond 12 months. On the other hand, it had cash of €5.80m and €23.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €541.8m.
This deficit is considerable relative to its market capitalization of €602.8m, so it does suggest shareholders should keep an eye on Tokmanni Group Oyj's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While Tokmanni Group Oyj's low debt to EBITDA ratio of 1.2 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 6.8 last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. The good news is that Tokmanni Group Oyj has increased its EBIT by 5.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tokmanni Group 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.