Is Vranken-Pommery Monopole Société Anonyme (EPA:VRAP) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Vranken-Pommery Monopole Société Anonyme (EPA:VRAP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Vranken-Pommery Monopole Société Anonyme

What Is Vranken-Pommery Monopole Société Anonyme's Net Debt?

As you can see below, Vranken-Pommery Monopole Société Anonyme had €675.3m of debt at December 2020, down from €718.6m a year prior. However, it does have €17.5m in cash offsetting this, leading to net debt of about €657.8m.

A Look At Vranken-Pommery Monopole Société Anonyme's Liabilities

Zooming in on the latest balance sheet data, we can see that Vranken-Pommery Monopole Société Anonyme had liabilities of €230.3m due within 12 months and liabilities of €695.6m due beyond that. Offsetting this, it had €17.5m in cash and €93.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €814.6m.

This deficit casts a shadow over the €165.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Vranken-Pommery Monopole Société Anonyme would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 1.1 times and a disturbingly high net debt to EBITDA ratio of 21.7 hit our confidence in Vranken-Pommery Monopole Société Anonyme like a one-two punch to the gut. The debt burden here is substantial. Another concern for investors might be that Vranken-Pommery Monopole Société Anonyme's EBIT fell 16% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vranken-Pommery Monopole Société Anonyme can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Vranken-Pommery Monopole Société Anonyme's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Vranken-Pommery Monopole Société Anonyme's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its conversion of EBIT to free cash flow is not so bad. Taking into account all the aforementioned factors, it looks like Vranken-Pommery Monopole Société Anonyme has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. To that end, you should learn about the 3 warning signs we've spotted with Vranken-Pommery Monopole Société Anonyme (including 1 which doesn't sit too well with us) .

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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