InVision (ETR:IVX) Could Easily Take On More Debt

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.' 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. As with many other companies InVision Aktiengesellschaft (ETR:IVX) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 InVision

How Much Debt Does InVision Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 InVision had €5.52m of debt, an increase on €1.00m, over one year. However, its balance sheet shows it holds €7.79m in cash, so it actually has €2.27m net cash.

How Strong Is InVision's Balance Sheet?

We can see from the most recent balance sheet that InVision had liabilities of €3.12m falling due within a year, and liabilities of €5.87m due beyond that. Offsetting these obligations, it had cash of €7.79m as well as receivables valued at €1.36m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that InVision's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €61.2m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, InVision boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that InVision grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if InVision can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While InVision has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, InVision recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that InVision has net cash of €2.27m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €872k, being 79% of its EBIT. So we don't think InVision's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example InVision has 4 warning signs (and 2 which are potentially serious) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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