Does Verimatrix Société anonyme (EPA:VMX) Have A Healthy Balance Sheet?

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 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 Verimatrix Société anonyme (EPA:VMX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Verimatrix Société anonyme

How Much Debt Does Verimatrix Société anonyme Carry?

As you can see below, Verimatrix Société anonyme had US$59.9m of debt at June 2020, down from US$67.2m a year prior. However, it does have US$46.5m in cash offsetting this, leading to net debt of about US$13.5m.

How Strong Is Verimatrix Société anonyme's Balance Sheet?

We can see from the most recent balance sheet that Verimatrix Société anonyme had liabilities of US$34.3m falling due within a year, and liabilities of US$75.3m due beyond that. On the other hand, it had cash of US$46.5m and US$34.5m worth of receivables due within a year. So it has liabilities totalling US$28.6m more than its cash and near-term receivables, combined.

Given Verimatrix Société anonyme has a market capitalization of US$321.4m, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 0.70 times EBITDA, it is initially surprising to see that Verimatrix Société anonyme's EBIT has low interest coverage of 1.8 times. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that Verimatrix Société anonyme improved its EBIT from a last year's loss to a positive US$13m. 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 Verimatrix Société anonyme 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. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Verimatrix Société anonyme reported free cash flow worth 3.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Both Verimatrix Société anonyme's interest cover and its conversion of EBIT to free cash flow were discouraging. But at least its net debt to EBITDA is a gleaming silver lining to those clouds. We think that Verimatrix Société anonyme's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Verimatrix Société anonyme's earnings per share history for free.

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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