We Think Vassiliko Cement Works (CSE:VCW) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Vassiliko Cement Works Public Company Ltd (CSE:VCW) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vassiliko Cement Works

What Is Vassiliko Cement Works's Debt?

You can click the graphic below for the historical numbers, but it shows that Vassiliko Cement Works had €12.9m of debt in December 2020, down from €17.3m, one year before. However, it does have €13.8m in cash offsetting this, leading to net cash of €841.0k.

A Look At Vassiliko Cement Works' Liabilities

Zooming in on the latest balance sheet data, we can see that Vassiliko Cement Works had liabilities of €15.7m due within 12 months and liabilities of €31.8m due beyond that. On the other hand, it had cash of €13.8m and €7.63m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €26.2m.

Of course, Vassiliko Cement Works has a market capitalization of €184.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Vassiliko Cement Works boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Vassiliko Cement Works'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 you can't view debt in total isolation; since Vassiliko Cement Works will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vassiliko Cement Works 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. Happily for any shareholders, Vassiliko Cement Works actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Vassiliko Cement Works does have more liabilities than liquid assets, it also has net cash of €841.0k. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in €24m. So we are not troubled with Vassiliko Cement Works's debt use. 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 Vassiliko Cement Works has 2 warning signs (and 1 which doesn't sit too well with us) we think 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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