We Think Verbrec (ASX:VBC) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Verbrec Limited (ASX:VBC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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.

Check out our latest analysis for Verbrec

How Much Debt Does Verbrec Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Verbrec had debt of AU$7.76m, up from AU$7.34m in one year. On the flip side, it has AU$5.91m in cash leading to net debt of about AU$1.85m.

A Look At Verbrec's Liabilities

Zooming in on the latest balance sheet data, we can see that Verbrec had liabilities of AU$23.8m due within 12 months and liabilities of AU$9.72m due beyond that. Offsetting this, it had AU$5.91m in cash and AU$19.4m in receivables that were due within 12 months. So it has liabilities totalling AU$8.23m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Verbrec has a market capitalization of AU$31.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Over 12 months, Verbrec made a loss at the EBIT level, and saw its revenue drop to AU$109m, which is a fall of 9.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Verbrec had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$4.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$1.3m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Verbrec (of which 1 makes us a bit uncomfortable!) you should know about.

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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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.