We Think Téléverbier (EPA:TVRB) Can Stay On Top Of Its Debt

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.' 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, Téléverbier SA (EPA:TVRB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Téléverbier

How Much Debt Does Téléverbier Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2023 Téléverbier had CHF13.9m of debt, an increase on CHF3.01m, over one year. However, it does have CHF27.9m in cash offsetting this, leading to net cash of CHF14.0m.

A Look At Téléverbier's Liabilities

Zooming in on the latest balance sheet data, we can see that Téléverbier had liabilities of CHF33.0m due within 12 months and liabilities of CHF38.5m due beyond that. On the other hand, it had cash of CHF27.9m and CHF7.85m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF35.7m.

This is a mountain of leverage relative to its market capitalization of CHF56.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Téléverbier also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Téléverbier grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Téléverbier's earnings that will influence how the balance sheet holds up in the future. 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. Téléverbier 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. Looking at the most recent two years, Téléverbier recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Téléverbier's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF14.0m. And we liked the look of last year's 78% year-on-year EBIT growth. So we don't have any problem with Téléverbier's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Téléverbier .

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.