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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. 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 VITA 34

How Much Debt Does VITA 34 Carry?

The image below, which you can click on for greater detail, shows that VITA 34 had debt of €14.0m at the end of March 2023, a reduction from €20.0m over a year. But on the other hand it also has €14.7m in cash, leading to a €686.0k net cash position.

How Strong Is VITA 34's Balance Sheet?

The latest balance sheet data shows that VITA 34 had liabilities of €70.1m due within a year, and liabilities of €67.7m falling due after that. Offsetting these obligations, it had cash of €14.7m as well as receivables valued at €21.0m due within 12 months. So it has liabilities totalling €102.1m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €77.6m, we think shareholders really should watch VITA 34's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. VITA 34 boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, VITA 34 reported revenue of €71m, which is a gain of 84%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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. And over the same period it saw negative free cash outflow of €9.8m and booked a €27m accounting loss. Given it only has net cash of €686.0k, the company may need to raise more capital if it doesn't reach break-even soon. VITA 34's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for VITA 34 that you should be aware of before investing here.

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. 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.