VERBIO Vereinigte BioEnergie (ETR:VBK) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that VERBIO Vereinigte BioEnergie AG (ETR:VBK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 March 2022; about the same as the year before. But on the other hand it also has €171.9m in cash, leading to a €141.9m net cash position.

How Strong Is VERBIO Vereinigte BioEnergie's Balance Sheet?

We can see from the most recent balance sheet that VERBIO Vereinigte BioEnergie had liabilities of €211.4m falling due within a year, and liabilities of €63.9m due beyond that. On the other hand, it had cash of €171.9m and €111.5m worth of receivables due within a year. So it actually has €8.16m more liquid assets than total liabilities.

This state of affairs indicates that VERBIO Vereinigte BioEnergie's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €4.21b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that VERBIO Vereinigte BioEnergie has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that VERBIO Vereinigte BioEnergie grew its EBIT by 227% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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. In the last three years, VERBIO Vereinigte BioEnergie's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case VERBIO Vereinigte BioEnergie has €141.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 227% year-on-year EBIT growth. So is VERBIO Vereinigte BioEnergie's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example VERBIO Vereinigte BioEnergie has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.