We Think Vente-Unique.com (EPA:ALVU) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Vente-Unique.com SA (EPA:ALVU) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vente-Unique.com

What Is Vente-Unique.com's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Vente-Unique.com had debt of €2.24m, up from €388.0k in one year. But it also has €18.0m in cash to offset that, meaning it has €15.8m net cash.

How Healthy Is Vente-Unique.com's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vente-Unique.com had liabilities of €28.7m due within 12 months and liabilities of €4.28m due beyond that. Offsetting these obligations, it had cash of €18.0m as well as receivables valued at €7.70m due within 12 months. So its liabilities total €7.26m more than the combination of its cash and short-term receivables.

Since publicly traded Vente-Unique.com shares are worth a total of €151.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Vente-Unique.com boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Vente-Unique.com grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vente-Unique.com's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vente-Unique.com 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. During the last three years, Vente-Unique.com produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vente-Unique.com has €15.8m in net cash. And we liked the look of last year's 58% year-on-year EBIT growth. So is Vente-Unique.com'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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Vente-Unique.com .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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