Virbac (EPA:VIRP) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Virbac SA (EPA:VIRP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Virbac

What Is Virbac's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Virbac had €134.0m of debt, an increase on €117.2m, over one year. However, its balance sheet shows it holds €224.3m in cash, so it actually has €90.3m net cash.

How Healthy Is Virbac's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Virbac had liabilities of €377.3m due within 12 months and liabilities of €145.4m due beyond that. Offsetting this, it had €224.3m in cash and €228.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €69.6m.

Given Virbac has a market capitalization of €2.20b, 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. 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.

But the other side of the story is that Virbac saw its EBIT decline by 3.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Virbac'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Virbac's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 €90.3m. 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.

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.