Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Vetoquinol SA (EPA:VETO) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Vetoquinol
What Is Vetoquinol’s Net Debt?
The image below, which you can click on for greater detail, shows that Vetoquinol had debt of €1.41m at the end of December 2019, a reduction from €6.67m over a year. But it also has €84.5m in cash to offset that, meaning it has €83.1m net cash.
A Look At Vetoquinol’s Liabilities
We can see from the most recent balance sheet that Vetoquinol had liabilities of €92.7m falling due within a year, and liabilities of €32.8m due beyond that. On the other hand, it had cash of €84.5m and €91.4m worth of receivables due within a year. So it can boast €50.4m more liquid assets than total liabilities.
This surplus suggests that Vetoquinol has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vetoquinol boasts net cash, so it’s fair to say it does not have a heavy debt load!
But the other side of the story is that Vetoquinol saw its EBIT decline by 4.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Vetoquinol’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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. Vetoquinol may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Vetoquinol recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Vetoquinol has net cash of €83.1m, as well as more liquid assets than liabilities. So is Vetoquinol’s debt a risk? It doesn’t seem so to us. Over time, share prices tend to follow earnings per share, so if you’re interested in Vetoquinol, you may well want to click here to check an interactive graph of its earnings per share history.
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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.