Is va-Q-tec (ETR:VQT) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies va-Q-tec AG (ETR:VQT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 va-Q-tec

What Is va-Q-tec's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 va-Q-tec had debt of €37.5m, up from €33.8m in one year. However, because it has a cash reserve of €11.9m, its net debt is less, at about €25.7m.

How Strong Is va-Q-tec's Balance Sheet?

The latest balance sheet data shows that va-Q-tec had liabilities of €31.2m due within a year, and liabilities of €35.4m falling due after that. On the other hand, it had cash of €11.9m and €5.80m worth of receivables due within a year. So it has liabilities totalling €48.9m more than its cash and near-term receivables, combined.

Of course, va-Q-tec has a market capitalization of €431.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if va-Q-tec 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.

Over 12 months, va-Q-tec reported revenue of €76m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, va-Q-tec had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €3.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €1.6m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that va-Q-tec is showing 1 warning sign in our investment analysis , you should know about...

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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