Viscofan (BME:VIS) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Viscofan, S.A. (BME:VIS) 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Viscofan

What Is Viscofan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Viscofan had €85.3m of debt in June 2021, down from €157.8m, one year before. However, its balance sheet shows it holds €95.8m in cash, so it actually has €10.5m net cash.

A Look At Viscofan's Liabilities

Zooming in on the latest balance sheet data, we can see that Viscofan had liabilities of €177.3m due within 12 months and liabilities of €143.2m due beyond that. Offsetting this, it had €95.8m in cash and €208.4m in receivables that were due within 12 months. So its liabilities total €16.3m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Viscofan'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 €2.80b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Viscofan boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Viscofan grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Viscofan 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. During the last three years, Viscofan produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Viscofan's liabilities, but we can be reassured by the fact it has has net cash of €10.5m. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in €131m. So is Viscofan's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Viscofan .

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. 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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