Does Vértice Trescientos Sesenta Grados (BME:VER) Have A Healthy Balance Sheet?

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. As with many other companies Vértice Trescientos Sesenta Grados, S.A. (BME:VER) makes use of debt. But is this debt a concern to shareholders?

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 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, 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.

Check out our latest analysis for Vértice Trescientos Sesenta Grados

How Much Debt Does Vértice Trescientos Sesenta Grados Carry?

As you can see below, at the end of September 2020, Vértice Trescientos Sesenta Grados had €7.13m of debt, up from €2.38m a year ago. Click the image for more detail. However, its balance sheet shows it holds €8.55m in cash, so it actually has €1.42m net cash.

How Healthy Is Vértice Trescientos Sesenta Grados' Balance Sheet?

According to the last reported balance sheet, Vértice Trescientos Sesenta Grados had liabilities of €14.3m due within 12 months, and liabilities of €9.60m due beyond 12 months. Offsetting these obligations, it had cash of €8.55m as well as receivables valued at €6.96m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.39m.

Given Vértice Trescientos Sesenta Grados has a market capitalization of €330.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Vértice Trescientos Sesenta Grados also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Vértice Trescientos Sesenta Grados if management cannot prevent a repeat of the 54% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vértice Trescientos Sesenta Grados will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vértice Trescientos Sesenta Grados 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, Vértice Trescientos Sesenta Grados saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about Vértice Trescientos Sesenta Grados's liabilities, but we can be reassured by the fact it has has net cash of €1.42m. So although we see some areas for improvement, we're not too worried about Vértice Trescientos Sesenta Grados's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Vértice Trescientos Sesenta Grados has 2 warning signs (and 1 which is 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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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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