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.' 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, Veris Limited (ASX:VRS) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Veris
How Much Debt Does Veris Carry?
As you can see below, Veris had AU$6.95m of debt at June 2020, down from AU$11.4m a year prior. On the flip side, it has AU$1.94m in cash leading to net debt of about AU$5.01m.
How Healthy Is Veris's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Veris had liabilities of AU$35.8m due within 12 months and liabilities of AU$18.1m due beyond that. On the other hand, it had cash of AU$1.94m and AU$19.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$32.9m.
This deficit is considerable relative to its market capitalization of AU$33.7m, so it does suggest shareholders should keep an eye on Veris's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Veris's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Veris had a loss before interest and tax, and actually shrunk its revenue by 13%, to AU$94m. That's not what we would hope to see.
Caveat Emptor
Not only did Veris's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping AU$12m. 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. We would feel better if it turned its trailing twelve month loss of AU$23m into a profit. So to be blunt we do think it is risky. 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. To that end, you should learn about the 5 warning signs we've spotted with Veris (including 1 which makes us a bit uncomfortable) .
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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About ASX:VRS
Veris
Provides surveying and spatial data services primarily in Australia.
Flawless balance sheet and good value.
