We Think va-Q-tec (ETR:VQT) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, va-Q-tec AG (ETR:VQT) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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.

View our latest analysis for va-Q-tec

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

You can click the graphic below for the historical numbers, but it shows that as of March 2021 va-Q-tec had €46.7m of debt, an increase on €37.2m, over one year. However, it also had €13.1m in cash, and so its net debt is €33.6m.

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

According to the last reported balance sheet, va-Q-tec had liabilities of €24.0m due within 12 months, and liabilities of €55.3m due beyond 12 months. Offsetting this, it had €13.1m in cash and €8.37m in receivables that were due within 12 months. So its liabilities total €57.8m more than the combination of its cash and short-term receivables.

Given va-Q-tec has a market capitalization of €428.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine va-Q-tec's ability to maintain a healthy balance sheet going forward. 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 €85m, 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

Over the last twelve months va-Q-tec produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €1.5m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €8.4m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with va-Q-tec (including 1 which is significant) .

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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