These 4 Measures Indicate That Vetropack Holding (VTX:VETN) Is Using Debt Safely

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.' 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, Vetropack Holding AG (VTX:VETN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Vetropack Holding

What Is Vetropack Holding's Debt?

As you can see below, Vetropack Holding had CHF37.5m of debt at December 2021, down from CHF44.8m a year prior. However, its balance sheet shows it holds CHF126.2m in cash, so it actually has CHF88.7m net cash.

How Healthy Is Vetropack Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vetropack Holding had liabilities of CHF212.4m due within 12 months and liabilities of CHF60.9m due beyond that. On the other hand, it had cash of CHF126.2m and CHF158.6m worth of receivables due within a year. So it actually has CHF11.5m more liquid assets than total liabilities.

This state of affairs indicates that Vetropack Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CHF718.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Vetropack Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Vetropack Holding grew its EBIT by 7.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vetropack Holding 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vetropack Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Vetropack Holding produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Vetropack Holding has CHF88.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF66m, being 67% of its EBIT. So we don't think Vetropack Holding's use of debt is 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. For example - Vetropack Holding has 2 warning signs we think you should be aware of.

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.