These 4 Measures Indicate That VERBIO Vereinigte BioEnergie (ETR:VBK) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that VERBIO Vereinigte BioEnergie AG (ETR:VBK) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for VERBIO Vereinigte BioEnergie

What Is VERBIO Vereinigte BioEnergie's Debt?

The chart below, which you can click on for greater detail, shows that VERBIO Vereinigte BioEnergie had €30.0m in debt in September 2022; about the same as the year before. But it also has €214.9m in cash to offset that, meaning it has €184.9m net cash.

How Healthy Is VERBIO Vereinigte BioEnergie's Balance Sheet?

We can see from the most recent balance sheet that VERBIO Vereinigte BioEnergie had liabilities of €297.5m falling due within a year, and liabilities of €47.9m due beyond that. Offsetting this, it had €214.9m in cash and €128.3m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to VERBIO Vereinigte BioEnergie's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €3.70b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Better yet, VERBIO Vereinigte BioEnergie grew its EBIT by 326% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. VERBIO Vereinigte BioEnergie may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, VERBIO Vereinigte BioEnergie's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down 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 €184.9m. And we liked the look of last year's 326% year-on-year EBIT growth. So is VERBIO Vereinigte BioEnergie's debt a risk? It doesn't seem so to us. 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 VERBIO Vereinigte BioEnergie is showing 2 warning signs in our investment analysis , you should know about...

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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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.