Is Vetoquinol (EPA:VETO) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Vetoquinol SA (EPA:VETO) 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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Vetoquinol

What Is Vetoquinol's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Vetoquinol had debt of €22.3m, up from €741.0k in one year. But it also has €51.1m in cash to offset that, meaning it has €28.8m net cash.

How Healthy Is Vetoquinol's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vetoquinol had liabilities of €155.8m due within 12 months and liabilities of €35.7m due beyond that. Offsetting these obligations, it had cash of €51.1m as well as receivables valued at €93.5m due within 12 months. So its liabilities total €46.9m more than the combination of its cash and short-term receivables.

Given Vetoquinol has a market capitalization of €1.45b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Vetoquinol boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Vetoquinol grew its EBIT by 57% 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 future earnings, more than anything, that will determine Vetoquinol'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. Vetoquinol 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. In the last three years, Vetoquinol created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

We could understand if investors are concerned about Vetoquinol's liabilities, but we can be reassured by the fact it has has net cash of €28.8m. And we liked the look of last year's 57% year-on-year EBIT growth. So we don't think Vetoquinol's use of debt is risky. 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. For example - Vetoquinol has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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