Is VITA 34 (ETR:V3V) Using Too Much Debt?

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 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 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

You can click the graphic below for the historical numbers, but it shows that VITA 34 had €15.5m of debt in June 2023, down from €18.4m, one year before. But on the other hand it also has €15.8m in cash, leading to a €248.0k net cash position.

How Healthy Is VITA 34's Balance Sheet?

According to the last reported balance sheet, VITA 34 had liabilities of €71.7m due within 12 months, and liabilities of €69.9m due beyond 12 months. Offsetting this, it had €15.8m in cash and €21.6m in receivables that were due within 12 months. So its liabilities total €104.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €64.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, VITA 34 would probably need a major re-capitalization if its creditors were to demand repayment. 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. 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.

Over 12 months, VITA 34 reported revenue of €73m, which is a gain of 46%, 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 we do note that VITA 34 had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €5.6m and booked a €24m accounting loss. With only €248.0k on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, VITA 34 may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 2 warning signs with VITA 34 , and understanding them should be part of your investment process.

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.