Viva Energy Group (ASX:VEA) Has Debt But No Earnings; Should You Worry?

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. We note that Viva Energy Group Limited (ASX:VEA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Viva Energy Group

What Is Viva Energy Group's Net Debt?

As you can see below, Viva Energy Group had AU$153.3m of debt at December 2020, down from AU$264.6m a year prior. However, it does have AU$49.1m in cash offsetting this, leading to net debt of about AU$104.2m.

How Strong Is Viva Energy Group's Balance Sheet?

According to the last reported balance sheet, Viva Energy Group had liabilities of AU$1.61b due within 12 months, and liabilities of AU$2.75b due beyond 12 months. On the other hand, it had cash of AU$49.1m and AU$815.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$3.49b.

Given this deficit is actually higher than the company's market capitalization of AU$2.76b, we think shareholders really should watch Viva Energy Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Viva Energy Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Viva Energy Group had a loss before interest and tax, and actually shrunk its revenue by 25%, to AU$12b. To be frank that doesn't bode well.

Caveat Emptor

While Viva Energy Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost AU$128m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of AU$36m. In the meantime, we consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Viva Energy Group insider transactions.

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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