Is 4SC (FRA:VSC) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, 4SC AG (FRA:VSC) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for 4SC

What Is 4SC's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 4SC had €3.20m of debt, an increase on €3.03m, over one year. However, it does have €4.43m in cash offsetting this, leading to net cash of €1.23m.

A Look At 4SC's Liabilities

According to the last reported balance sheet, 4SC had liabilities of €547.0k due within 12 months, and liabilities of €3.64m due beyond 12 months. Offsetting this, it had €4.43m in cash and €173.0k in receivables that were due within 12 months. So it actually has €408.0k more liquid assets than total liabilities.

This state of affairs indicates that 4SC'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 €40.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that 4SC has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since 4SC will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, 4SC shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is 4SC?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year 4SC had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €9.6m and booked a €7.5m accounting loss. Given it only has net cash of €1.23m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that 4SC is showing 4 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.