David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Veris Limited (ASX:VRS) makes use of debt. But should shareholders be worried about its use of debt?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Veris
What Is Veris's Net Debt?
As you can see below, at the end of December 2020, Veris had AU$6.50m of debt, up from AU$5.67m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$2.44m, its net debt is less, at about AU$4.06m.
How Healthy Is Veris' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Veris had liabilities of AU$35.9m due within 12 months and liabilities of AU$22.5m due beyond that. Offsetting these obligations, it had cash of AU$2.44m as well as receivables valued at AU$18.0m due within 12 months. So its liabilities total AU$37.9m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of AU$41.0m, so it does suggest shareholders should keep an eye on Veris' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Veris's earnings that will influence how the balance sheet holds up in the future. 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 Veris had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to AU$94m. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Veris produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable AU$10m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of AU$9.0m. So in short it's a really risky stock. 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. To that end, you should learn about the 3 warning signs we've spotted with Veris (including 1 which is potentially serious) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
