We Think Vivendi (EPA:VIV) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Vivendi SE (EPA:VIV) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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 Vivendi

How Much Debt Does Vivendi Carry?

The image below, which you can click on for greater detail, shows that Vivendi had debt of €4.28b at the end of December 2021, a reduction from €6.40b over a year. However, its balance sheet shows it holds €4.46b in cash, so it actually has €179.0m net cash.

How Strong Is Vivendi's Balance Sheet?

According to the last reported balance sheet, Vivendi had liabilities of €8.80b due within 12 months, and liabilities of €5.38b due beyond 12 months. Offsetting these obligations, it had cash of €4.46b as well as receivables valued at €5.14b due within 12 months. So it has liabilities totalling €4.58b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Vivendi has a huge market capitalization of €11.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Vivendi also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Vivendi has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vivendi's ability to maintain a healthy balance sheet going forward. 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. Vivendi 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, Vivendi actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Vivendi does have more liabilities than liquid assets, it also has net cash of €179.0m. And it impressed us with free cash flow of €1.2b, being 117% of its EBIT. So is Vivendi's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Vivendi .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.