Does Viscofan (BME:VIS) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Viscofan, S.A. (BME:VIS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Viscofan

How Much Debt Does Viscofan Carry?

As you can see below, Viscofan had €116.8m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €92.1m in cash leading to net debt of about €24.6m.

A Look At Viscofan's Liabilities

The latest balance sheet data shows that Viscofan had liabilities of €219.1m due within a year, and liabilities of €126.9m falling due after that. On the other hand, it had cash of €92.1m and €208.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €45.3m.

Having regard to Viscofan's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €2.43b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Viscofan has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Viscofan has a low net debt to EBITDA ratio of only 0.10. And its EBIT covers its interest expense a whopping 606 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, Viscofan grew its EBIT by 7.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Viscofan 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Viscofan produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Viscofan's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that Viscofan is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. Given Viscofan has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.