Here's Why VERBIO Vereinigte BioEnergie (ETR:VBK) Can Manage Its Debt Responsibly

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.' 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. We can see that VERBIO Vereinigte BioEnergie AG (ETR:VBK) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for VERBIO Vereinigte BioEnergie

How Much Debt Does VERBIO Vereinigte BioEnergie Carry?

The image below, which you can click on for greater detail, shows that at June 2023 VERBIO Vereinigte BioEnergie had debt of €162.0m, up from €30.0m in one year. But on the other hand it also has €170.3m in cash, leading to a €8.29m net cash position.

How Healthy Is VERBIO Vereinigte BioEnergie's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VERBIO Vereinigte BioEnergie had liabilities of €242.5m due within 12 months and liabilities of €142.9m due beyond that. Offsetting this, it had €170.3m in cash and €104.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €110.4m.

Of course, VERBIO Vereinigte BioEnergie has a market capitalization of €2.30b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, VERBIO Vereinigte BioEnergie also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact VERBIO Vereinigte BioEnergie's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if VERBIO Vereinigte BioEnergie can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While VERBIO Vereinigte BioEnergie 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. Over the last three years, VERBIO Vereinigte BioEnergie reported free cash flow worth 10% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about VERBIO Vereinigte BioEnergie's liabilities, but we can be reassured by the fact it has has net cash of €8.29m. So we don't have any problem with VERBIO Vereinigte BioEnergie's use of debt. 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. We've identified 3 warning signs with VERBIO Vereinigte BioEnergie (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.