We Think Veris (ASX:VRS) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Veris Limited (ASX:VRS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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, at the end of December 2023, Veris had AU$4.76m of debt, up from AU$1.82m a year ago. Click the image for more detail. But on the other hand it also has AU$16.7m in cash, leading to a AU$11.9m net cash position.

How Healthy Is Veris' Balance Sheet?

We can see from the most recent balance sheet that Veris had liabilities of AU$20.6m falling due within a year, and liabilities of AU$17.5m due beyond that. Offsetting this, it had AU$16.7m in cash and AU$19.6m in receivables that were due within 12 months. So it has liabilities totalling AU$1.78m more than its cash and near-term receivables, combined.

Since publicly traded Veris shares are worth a total of AU$32.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Veris boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Veris's EBIT was down 66% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Veris's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Veris may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Veris actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Veris's liabilities, but we can be reassured by the fact it has has net cash of AU$11.9m. And it impressed us with free cash flow of AU$2.5m, being 168% of its EBIT. So we are not troubled with Veris's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Veris , 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.