We Think Vetoquinol (EPA:VETO) 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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vetoquinol

How Much Debt Does Vetoquinol Carry?

As you can see below, Vetoquinol had €9.05m of debt at June 2022, down from €22.3m a year prior. But on the other hand it also has €43.5m in cash, leading to a €34.4m net cash position.

How Strong Is Vetoquinol's Balance Sheet?

We can see from the most recent balance sheet that Vetoquinol had liabilities of €137.3m falling due within a year, and liabilities of €23.5m due beyond that. Offsetting these obligations, it had cash of €43.5m as well as receivables valued at €109.0m due within 12 months. So its liabilities total €8.34m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Vetoquinol's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €1.01b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Vetoquinol boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Vetoquinol saw its EBIT drop by 7.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vetoquinol 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vetoquinol has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Vetoquinol reported free cash flow worth 10% of its EBIT, which is really quite low. 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 €34.4m. So we don't have any problem with Vetoquinol's use of debt. 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. Case in point: We've spotted 1 warning sign for Vetoquinol you should be aware of.

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. 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.