Is Virbac (EPA:VIRP) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Virbac SA (EPA:VIRP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Virbac

How Much Debt Does Virbac Carry?

As you can see below, Virbac had €60.1m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has €179.9m in cash to offset that, meaning it has €119.8m net cash.

How Strong Is Virbac's Balance Sheet?

We can see from the most recent balance sheet that Virbac had liabilities of €390.6m falling due within a year, and liabilities of €103.9m due beyond that. Offsetting this, it had €179.9m in cash and €200.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €114.1m.

Of course, Virbac has a market capitalization of €2.41b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Virbac also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Virbac has increased its EBIT by 7.2% over twelve months, which should ease any concerns about debt repayment. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Virbac 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. In the last three years, Virbac's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €119.8m. On top of that, it increased its EBIT by 7.2% in the last twelve months. So we are not troubled with Virbac's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Virbac, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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

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.