Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Vergnet SA (EPA:ALVER) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
See our latest analysis for Vergnet
How Much Debt Does Vergnet Carry?
As you can see below, Vergnet had €4.34m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had €1.28m in cash, and so its net debt is €3.06m.
A Look At Vergnet's Liabilities
Zooming in on the latest balance sheet data, we can see that Vergnet had liabilities of €27.7m due within 12 months and liabilities of €2.03m due beyond that. On the other hand, it had cash of €1.28m and €21.7m worth of receivables due within a year. So its liabilities total €6.83m more than the combination of its cash and short-term receivables.
Vergnet has a market capitalization of €27.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vergnet 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.
In the last year Vergnet wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to €18m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Vergnet managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost €1.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €2.2m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 3 warning signs for Vergnet that you should be aware of.
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. 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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About ENXTPA:ALVER
Vergnet
Designs, develops, and installs renewable energy solutions in France and internationally.
Moderate and slightly overvalued.
