David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Veoneer, Inc. (NYSE:VNE) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Veoneer’s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Veoneer had debt of US$179.0m, up from US$13.0m in one year. However, it does have US$1.20b in cash offsetting this, leading to net cash of US$1.03b.
How Healthy Is Veoneer’s Balance Sheet?
The latest balance sheet data shows that Veoneer had liabilities of US$572.0m due within a year, and liabilities of US$331.0m falling due after that. Offsetting these obligations, it had cash of US$1.20b as well as receivables valued at US$335.0m due within 12 months. So it can boast US$636.0m more liquid assets than total liabilities.
This surplus liquidity suggests that Veoneer’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Veoneer boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Veoneer’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Veoneer had negative earnings before interest and tax, and actually shrunk its revenue by 12%, to US$2.0b. That’s not what we would hope to see.
So How Risky Is Veoneer?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Veoneer lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$402m and booked a US$451m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$1.03b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. For riskier companies like Veoneer I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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