Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Zur Rose Group AG (VTX:ROSE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Zur Rose Group’s Net Debt?
As you can see below, at the end of June 2019, Zur Rose Group had CHF111.5m of debt, up from none a year ago. Click the image for more detail. However, it does have CHF91.6m in cash offsetting this, leading to net debt of about CHF19.9m.
How Healthy Is Zur Rose Group’s Balance Sheet?
We can see from the most recent balance sheet that Zur Rose Group had liabilities of CHF198.8m falling due within a year, and liabilities of CHF171.4m due beyond that. Offsetting this, it had CHF91.6m in cash and CHF112.7m in receivables that were due within 12 months. So its liabilities total CHF165.9m more than the combination of its cash and short-term receivables.
Since publicly traded Zur Rose Group shares are worth a total of CHF954.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zur Rose Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Zur Rose Group reported revenue of CHF1.3b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Zur Rose Group had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at CHF49m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CHF67m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we’ve spotted with Zur Rose Group .
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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