Is Terveystalo Oyj (HEL:TTALO) using too much debt?

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Terveystalo Oyj (HEL:TTALO) uses debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

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What is Terveystalo Oyj’s debt?

As you can see below, at the end of June 2022, Terveystalo Oyj had a debt of 414.8 million euros, compared to 365.4 million euros a year ago. Click on the image for more details. However, he also had €42.3m in cash, so his net debt is €372.5m.

HLSE: TTALO Debt to Equity September 21, 2022

How healthy is Terveystalo Oyj’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Terveystalo Oyj had liabilities of €449.1m due within 12 months and liabilities of €439.7m due beyond. In return, it had €42.3 million in cash and €141.1 million in receivables due within 12 months. Its liabilities therefore total €705.4 million more than the combination of its cash and short-term receivables.

That’s a mountain of leverage compared to its €1.08 billion market cap. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

We would say that Terveystalo Oyj’s moderate net debt to EBITDA ratio (2.5) indicates prudence in terms of leverage. And its strong interest coverage of 21.8 times puts us even more at ease. Unfortunately, Terveystalo Oyj’s EBIT actually fell by 3.9% last year. If this earnings trend continues, its leverage will become heavy like the heart of a polar bear looking at its only cub. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Terveystalo Oyj’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Terveystalo Oyj has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

Terveystalo Oyj’s interest coverage was a real plus in this analysis, as was its conversion of EBIT to free cash flow. On the other hand, its level of total liabilities makes us a little less comfortable about its indebtedness. It should also be noted that Terveystalo Oyj belongs to the healthcare sector, which is often seen as quite defensive. Given this range of data points, we believe that Terveystalo Oyj is in a good position to manage its level of leverage. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Terveystalo Oyj you should know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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