Stock Analysis

Does Velocity Composites (LON:VEL) Have A Healthy Balance Sheet?

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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 Velocity Composites plc (LON:VEL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Velocity Composites

How Much Debt Does Velocity Composites Carry?

The image below, which you can click on for greater detail, shows that at April 2022 Velocity Composites had debt of UK£2.26m, up from UK£2.00m in one year. However, it does have UK£2.04m in cash offsetting this, leading to net debt of about UK£222.0k.

AIM:VEL Debt to Equity History October 1st 2022

How Strong Is Velocity Composites' Balance Sheet?

We can see from the most recent balance sheet that Velocity Composites had liabilities of UK£2.03m falling due within a year, and liabilities of UK£2.86m due beyond that. Offsetting these obligations, it had cash of UK£2.04m as well as receivables valued at UK£3.36m due within 12 months. So it actually has UK£507.0k more liquid assets than total liabilities.

This surplus suggests that Velocity Composites has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Velocity Composites'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.

In the last year Velocity Composites wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to UK£11m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Velocity Composites still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£996k. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Velocity Composites (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Velocity Composites is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Velocity Composites

Velocity Composites plc, together with its subsidiaries, provides engineered composite material kits to the aerospace industry in the United Kingdom, Europe, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth1
Past Performance0
Financial Health4

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet and slightly overvalued.