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.' 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. We note that Virbac SA (EPA:VIRP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Virbac
What Is Virbac's Debt?
As you can see below, Virbac had €90.7m of debt at June 2021, down from €432.4m a year prior. But on the other hand it also has €185.2m in cash, leading to a €94.4m net cash position.
How Healthy Is Virbac's Balance Sheet?
According to the last reported balance sheet, Virbac had liabilities of €356.2m due within 12 months, and liabilities of €106.5m due beyond 12 months. Offsetting these obligations, it had cash of €185.2m as well as receivables valued at €196.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €81.1m.
Of course, Virbac has a market capitalization of €3.01b, so these liabilities are probably manageable. 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, Virbac boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Virbac grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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 Virbac 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, a company can only pay off debt with cold hard cash, not accounting profits. Virbac 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 most recent three years, Virbac recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
We could understand if investors are concerned about Virbac's liabilities, but we can be reassured by the fact it has has net cash of €94.4m. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in €77m. So is Virbac's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Virbac you should know about.
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. 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.
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About ENXTPA:VIRP
Virbac
Manufactures and sells a range of products and services for companion animals and farm animals in France, Europe, Latin America, North America, Asia, Pacific, and Africa and the Middle East.
Very undervalued with flawless balance sheet.