Is Zur Rose Group (VTX:ROSE) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zur Rose Group AG (VTX:ROSE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zur Rose Group

What Is Zur Rose Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Zur Rose Group had debt of CHF484.1m, up from CHF319.6m in one year. On the flip side, it has CHF301.0m in cash leading to net debt of about CHF183.1m.

How Strong Is Zur Rose Group's Balance Sheet?

According to the last reported balance sheet, Zur Rose Group had liabilities of CHF156.7m due within 12 months, and liabilities of CHF590.1m due beyond 12 months. On the other hand, it had cash of CHF301.0m and CHF129.6m worth of receivables due within a year. So its liabilities total CHF316.2m more than the combination of its cash and short-term receivables.

Of course, Zur Rose Group has a market capitalization of CHF3.38b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Zur Rose 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 Zur Rose Group wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to CHF1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Zur Rose Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CHF127m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CHF127m in negative free cash flow over the last twelve months. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zur Rose Group 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. 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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