Is Valbiotis (EPA:ALVAL) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Valbiotis SA (EPA:ALVAL) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Valbiotis

How Much Debt Does Valbiotis Carry?

As you can see below, Valbiotis had €5.51m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have €25.0m in cash offsetting this, leading to net cash of €19.5m.

How Healthy Is Valbiotis' Balance Sheet?

The latest balance sheet data shows that Valbiotis had liabilities of €8.77m due within a year, and liabilities of €4.94m falling due after that. Offsetting this, it had €25.0m in cash and €4.24m in receivables that were due within 12 months. So it can boast €15.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Valbiotis' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Valbiotis boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Valbiotis can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Valbiotis reported revenue of €4.7m, which is a gain of 503%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Valbiotis?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Valbiotis had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €8.3m and booked a €7.4m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €19.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Valbiotis's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Valbiotis (1 doesn't sit too well with us) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com