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.' 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 Vetropack Holding AG (VTX:VETN) does have debt on its balance sheet. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Vetropack Holding
What Is Vetropack Holding's Net Debt?
As you can see below, at the end of December 2020, Vetropack Holding had CHF44.8m of debt, up from CHF22.0m a year ago. Click the image for more detail. But it also has CHF104.5m in cash to offset that, meaning it has CHF59.7m net cash.
How Strong Is Vetropack Holding's Balance Sheet?
The latest balance sheet data shows that Vetropack Holding had liabilities of CHF152.4m due within a year, and liabilities of CHF75.5m falling due after that. On the other hand, it had cash of CHF104.5m and CHF136.6m worth of receivables due within a year. So it actually has CHF13.2m more liquid assets than total liabilities.
Having regard to Vetropack Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF1.15b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Vetropack Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Vetropack Holding's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 52% 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 CHF59.7m in net cash and a decent-looking balance sheet. So we don't have any problem with Vetropack Holding's use of debt. 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, we've discovered 1 warning sign for Vetropack Holding that you should be aware of before investing here.
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. 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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About SWX:VETN
Vetropack Holding
Offers glass packaging products for the food and beverage industry.
Undervalued with excellent balance sheet.
