Does Aevis Victoria (VTX:AEVS) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Aevis Victoria SA (VTX:AEVS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aevis Victoria

How Much Debt Does Aevis Victoria Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Aevis Victoria had CHF1.01b of debt, an increase on CHF918.9m, over one year. However, it does have CHF54.6m in cash offsetting this, leading to net debt of about CHF950.7m.

A Look At Aevis Victoria's Liabilities

We can see from the most recent balance sheet that Aevis Victoria had liabilities of CHF236.3m falling due within a year, and liabilities of CHF1.04b due beyond that. Offsetting this, it had CHF54.6m in cash and CHF247.7m in receivables that were due within 12 months. So it has liabilities totalling CHF975.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CHF1.40b, so it does suggest shareholders should keep an eye on Aevis Victoria's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.072 times and a disturbingly high net debt to EBITDA ratio of 17.3 hit our confidence in Aevis Victoria like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Aevis Victoria is that it turned last year's EBIT loss into a gain of CHF2.1m, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aevis Victoria'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Aevis Victoria recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

On the face of it, Aevis Victoria's net debt to EBITDA left us tentative about the stock, and its interest cover was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to grow its EBIT isn't such a worry. It's also worth noting that Aevis Victoria is in the Healthcare industry, which is often considered to be quite defensive. Overall, it seems to us that Aevis Victoria's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example Aevis Victoria has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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. 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.