Is Alma Media Oyj (HEL: ALMA) using too much debt?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt can lead to bankruptcy. We can see that Alma Media Oyj (HEL: ALMA) uses debt in its business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

Discover our latest analysis for Alma Media Oyj

What is Alma Media Oyj’s debt?

As you can see below, at the end of September 2021, Alma Media Oyj had a debt of 200.0 million euros, down from zero a year ago. Click on the image for more details. However, because it has a cash reserve of € 30.0 million, its net debt is lower, at around € 170.0 million.

HLSE: ALMA History of debt to equity December 13, 2021

How healthy is Alma Media Oyj’s track record?

According to the last published balance sheet, Alma Media Oyj had liabilities of 278.8 million euros within 12 months and liabilities of 63.4 million euros due beyond 12 months. In compensation for these obligations, he had cash of € 30.0 million as well as receivables valued at € 33.3 million within 12 months. It therefore has total liabilities of € 278.9 million more than its combined cash and short-term receivables.

Alma Media Oyj has a market capitalization of 916.3 million euros, so it could most likely raise cash to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Alma Media Oyj has a debt to EBITDA ratio of 2.6, which signals significant debt, but is still fairly reasonable for most types of businesses. However, its interest coverage of 27.9 is very high, suggesting that interest charges on debt are currently quite low. One way for Alma Media Oyj to beat its debt would be to stop borrowing more but continue to increase its EBIT by around 17%, as it did last year. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Alma Media Oyj can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Alma Media Oyj has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

The good news is that Alma Media Oyj’s demonstrated ability to cover interest costs with EBIT thrills us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its net debt to EBITDA. When we consider the range of factors above, it seems Alma Media Oyj is pretty reasonable with its use of debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – Alma Media Oyj a 2 warning signs we think you should be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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

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John A. Bogar