We Think VERBIO Vereinigte BioEnergie (ETR:VBK) Can Stay On Top Of Its 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies VERBIO Vereinigte BioEnergie AG (ETR:VBK) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for VERBIO Vereinigte BioEnergie

What Is VERBIO Vereinigte BioEnergie's Debt?

As you can see below, VERBIO Vereinigte BioEnergie had €30.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has €171.9m in cash to offset that, meaning it has €141.9m net cash.

How Healthy Is VERBIO Vereinigte BioEnergie's Balance Sheet?

According to the last reported balance sheet, VERBIO Vereinigte BioEnergie had liabilities of €211.4m due within 12 months, and liabilities of €63.9m due beyond 12 months. Offsetting these obligations, it had cash of €171.9m as well as receivables valued at €111.5m due within 12 months. 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 €3.34b 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.

Better yet, VERBIO Vereinigte BioEnergie grew its EBIT by 227% 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 it is future earnings, more than anything, that will determine VERBIO Vereinigte BioEnergie's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that VERBIO Vereinigte BioEnergie has net cash of €141.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 227% year-on-year EBIT growth. So we don't think VERBIO Vereinigte BioEnergie's use of debt 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 3 warning signs we've spotted with VERBIO Vereinigte BioEnergie (including 2 which are a bit unpleasant) .

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.