Is VITA 34 (ETR:V3V) Using Debt In A Risky Way?

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 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. We note that VITA 34 AG (ETR:V3V) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for VITA 34

How Much Debt Does VITA 34 Carry?

As you can see below, at the end of September 2022, VITA 34 had €16.9m of debt, up from €2.70m a year ago. Click the image for more detail. However, its balance sheet shows it holds €19.8m in cash, so it actually has €2.93m net cash.

A Look At VITA 34's Liabilities

The latest balance sheet data shows that VITA 34 had liabilities of €67.7m due within a year, and liabilities of €70.0m falling due after that. Offsetting this, it had €19.8m in cash and €21.3m in receivables that were due within 12 months. So its liabilities total €96.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €97.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, VITA 34 boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, VITA 34 reported revenue of €63m, which is a gain of 202%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is VITA 34?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months VITA 34 lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €9.1m of cash and made a loss of €12m. Given it only has net cash of €2.93m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, VITA 34's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like VITA 34 I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.