Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Veoneer, Inc. (NYSE:VNE) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company’s debt levels is to consider its cash and debt together.
What Is Veoneer’s Net Debt?
As you can see below, Veoneer had US$168.0m of debt at June 2020, down from US$179.0m a year prior. However, it does have US$851.0m in cash offsetting this, leading to net cash of US$683.0m.
A Look At Veoneer’s Liabilities
The latest balance sheet data shows that Veoneer had liabilities of US$429.0m due within a year, and liabilities of US$334.0m falling due after that. Offsetting this, it had US$851.0m in cash and US$214.0m in receivables that were due within 12 months. So it can boast US$302.0m more liquid assets than total liabilities.
This surplus suggests that Veoneer is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Veoneer has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Veoneer’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.
In the last year Veoneer had negative earnings before interest and tax, and actually shrunk its revenue by 28%, to US$1.5b. That makes us nervous, to say the least.
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$436.0m and booked a US$552.0m accounting loss. But at least it has US$683.0m on the balance sheet to spend on growth, near-term. 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. 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. For instance, we’ve identified 2 warning signs for Veoneer that you should be aware of.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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