Is InVision (ETR:IVX) Using Too Much Debt?

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. As with many other companies InVision Aktiengesellschaft (ETR:IVX) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, 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.

See our latest analysis for InVision

What Is InVision's Debt?

As you can see below, at the end of March 2023, InVision had €8.04m of debt, up from €5.04m a year ago. Click the image for more detail. However, its balance sheet shows it holds €8.17m in cash, so it actually has €128.5k net cash.

How Strong Is InVision's Balance Sheet?

We can see from the most recent balance sheet that InVision had liabilities of €5.52m falling due within a year, and liabilities of €9.09m due beyond that. Offsetting these obligations, it had cash of €8.17m as well as receivables valued at €2.86m due within 12 months. So its liabilities total €3.58m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since InVision has a market capitalization of €13.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, InVision also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 InVision'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.

In the last year InVision wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to €15m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is InVision?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months InVision lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €2.7m and booked a €4.1m accounting loss. Given it only has net cash of €128.5k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with InVision , and understanding them should be part of your investment process.

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.