Does Verbrec (ASX:VBC) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Verbrec Limited (ASX:VBC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Verbrec

How Much Debt Does Verbrec Carry?

As you can see below, Verbrec had AU$2.15m of debt at June 2021, down from AU$3.55m a year prior. However, its balance sheet shows it holds AU$8.34m in cash, so it actually has AU$6.19m net cash.

How Strong Is Verbrec's Balance Sheet?

We can see from the most recent balance sheet that Verbrec had liabilities of AU$26.5m falling due within a year, and liabilities of AU$7.55m due beyond that. Offsetting these obligations, it had cash of AU$8.34m as well as receivables valued at AU$21.5m due within 12 months. So it has liabilities totalling AU$4.25m more than its cash and near-term receivables, combined.

Since publicly traded Verbrec shares are worth a total of AU$25.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Verbrec also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Verbrec will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Verbrec had a loss before interest and tax, and actually shrunk its revenue by 16%, to AU$98m. We would much prefer see growth.

So How Risky Is Verbrec?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Verbrec had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$1.9m of cash and made a loss of AU$3.9m. With only AU$6.19m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. Be aware that Verbrec is showing 4 warning signs in our investment analysis , and 1 of those is significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.