These 4 Measures Indicate That InVision (ETR:IVX) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, InVision Aktiengesellschaft (ETR:IVX) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 September 2020 InVision had €5.76m of debt, an increase on €1.00m, over one year. But on the other hand it also has €8.83m in cash, leading to a €3.07m net cash position.

A Look At InVision's Liabilities

According to the last reported balance sheet, InVision had liabilities of €4.10m due within 12 months, and liabilities of €6.11m due beyond 12 months. On the other hand, it had cash of €8.83m and €1.15m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €238.1k.

Having regard to InVision's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €46.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, InVision boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that InVision has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. InVision may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, InVision recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about InVision's liabilities, but we can be reassured by the fact it has has net cash of €3.07m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in €667k. So we don't think InVision's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with InVision (at least 3 which don't sit too well with us) , 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. 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.
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