Here's Why VITA 34 (ETR:V3V) 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 VITA 34 AG (ETR:V3V) does use debt in its business. But should shareholders be worried about its use of debt?

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

See our latest analysis for VITA 34

What Is VITA 34's Debt?

The image below, which you can click on for greater detail, shows that VITA 34 had debt of €4.21m at the end of September 2020, a reduction from €6.37m over a year. However, it does have €10.5m in cash offsetting this, leading to net cash of €6.31m.

A Look At VITA 34's Liabilities

According to the last reported balance sheet, VITA 34 had liabilities of €8.10m due within 12 months, and liabilities of €21.2m due beyond 12 months. Offsetting this, it had €10.5m in cash and €3.64m in receivables that were due within 12 months. So its liabilities total €15.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since VITA 34 has a market capitalization of €64.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, VITA 34 boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that VITA 34 has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine VITA 34'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. VITA 34 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. Over the last three years, VITA 34 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While VITA 34 does have more liabilities than liquid assets, it also has net cash of €6.31m. And it impressed us with free cash flow of €4.2m, being 137% of its EBIT. So we don't have any problem with VITA 34's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for VITA 34 you should know about.

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. 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.
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