Vetropack Holding (VTX:VETN) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Vetropack Holding AG (VTX:VETN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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

See our latest analysis for Vetropack Holding

How Much Debt Does Vetropack Holding Carry?

As you can see below, at the end of June 2022, Vetropack Holding had CHF189.7m of debt, up from CHF42.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds CHF229.3m in cash, so it actually has CHF39.6m 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 CHF231.4m due within 12 months and liabilities of CHF211.5m due beyond that. On the other hand, it had cash of CHF229.3m and CHF200.0m worth of receivables due within a year. So its liabilities total CHF13.6m more than the combination of its cash and short-term receivables.

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 CHF681.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Vetropack Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Vetropack Holding grew its EBIT by 2.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Vetropack Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vetropack Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Vetropack Holding recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Vetropack Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF39.6m. So we are not troubled with Vetropack Holding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Vetropack Holding you should be aware of, and 1 of them is concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.