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. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, va-Q-tec SA (ETR: VQT) carries the debt. 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. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for va-Q-tec
How much debt is Q-tec carrying?
You can click on the graph below for historical figures, but it shows that as of September 2021, va-Q-tec had 55.0 million euros in debt, an increase from 40.4 million euros. euros, over one year. On the other hand, it has 10 million euros of liquidity leading to a net debt of around 44.9 million euros.
How strong is va-Q-tec’s balance sheet?
The latest balance sheet data shows that va-Q-tec had debts of 36.3 million euros maturing within one year, and debts of 52.6 million euros maturing through the following. In return, he had â¬ 10.0 million in cash and â¬ 9.42 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by â¬ 69.5 million.
va-Q-tec has a market cap of 327.3 million euros, so it could most likely raise funds 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.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
Low interest coverage of 0.39 times and an extremely high Net Debt to EBITDA ratio of 6.6 affected our confidence in va-Q-tec like a punch in the gut. This means that we would consider him to be in heavy debt. However, the bright side is that va-Q-tec achieved a positive EBIT of â¬ 826k over the past twelve months, an improvement over the loss of the previous year. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether va-Q-tec can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Over the past year, va-Q-tec has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
To be frank, va-Q-tec’s interest coverage and track record of converting EBIT to free cash flow makes us rather uncomfortable with its debt levels. But at least his total liability level isn’t that bad. Overall, we think it’s fair to say that va-Q-tec has enough debt that there is real risk around the balance sheet. If all goes well it may pay off, but the downside to this debt is a greater risk of permanent losses. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with va-Q-tec (including 2 which are a bit disturbing).
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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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.