Is BVZ Holding (VTX:BVZN) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BVZ Holding AG (VTX:BVZN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BVZ Holding

What Is BVZ Holding's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 BVZ Holding had debt of CHF167.5m, up from CHF144.7m in one year. However, because it has a cash reserve of CHF19.6m, its net debt is less, at about CHF147.9m.

How Strong Is BVZ Holding's Balance Sheet?

According to the last reported balance sheet, BVZ Holding had liabilities of CHF33.0m due within 12 months, and liabilities of CHF188.5m due beyond 12 months. Offsetting these obligations, it had cash of CHF19.6m as well as receivables valued at CHF9.37m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF192.5m.

When you consider that this deficiency exceeds the company's CHF170.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is BVZ Holding'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.

In the last year BVZ Holding had a loss before interest and tax, and actually shrunk its revenue by 32%, to CHF121m. To be frank that doesn't bode well.

Caveat Emptor

While BVZ Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CHF6.5m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CHF49m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that BVZ Holding is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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