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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Verbrec Limited (ASX:VBC) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Verbrec

How Much Debt Does Verbrec Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Verbrec had AU$6.78m of debt, an increase on AU$737.0k, over one year. However, it also had AU$4.46m in cash, and so its net debt is AU$2.32m.

A Look At Verbrec's Liabilities

According to the last reported balance sheet, Verbrec had liabilities of AU$36.8m due within 12 months, and liabilities of AU$4.22m due beyond 12 months. Offsetting these obligations, it had cash of AU$4.46m as well as receivables valued at AU$21.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$15.1m.

This is a mountain of leverage relative to its market capitalization of AU$17.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Verbrec will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Verbrec made a loss at the EBIT level, and saw its revenue drop to AU$118m, which is a fall of 2.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Verbrec produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$7.6m. 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 AU$4.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Verbrec (at least 3 which make us uncomfortable) , and understanding them should be part of your investment process.

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.