David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Finnair Oyj (HEL:FIA1S) makes use of debt. But the real question is whether this debt is making the company risky.
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 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Finnair Oyj
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Finnair Oyj had €1.44b of debt, an increase on €888.8m, over one year. However, it does have €1.21b in cash offsetting this, leading to net debt of about €228.0m.
According to the last reported balance sheet, Finnair Oyj had liabilities of €733.9m due within 12 months, and liabilities of €2.59b due beyond 12 months. Offsetting these obligations, it had cash of €1.21b as well as receivables valued at €85.0m due within 12 months. So it has liabilities totalling €2.03b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €829.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Finnair Oyj would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Finnair Oyj's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Finnair Oyj had a loss before interest and tax, and actually shrunk its revenue by 65%, to €527m. That makes us nervous, to say the least.
While Finnair 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. Indeed, it lost a very considerable €401m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €408m over the last twelve months. That means it's on the risky side of things. For riskier companies like Finnair 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.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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