Venture Life Group (LON:VLG) Could Easily Take On More Debt

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 can see that Venture Life Group plc (LON:VLG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Venture Life Group

What Is Venture Life Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Venture Life Group had UK£6.62m of debt, an increase on UK£4.37m, over one year. But on the other hand it also has UK£42.1m in cash, leading to a UK£35.5m net cash position.

How Healthy Is Venture Life Group's Balance Sheet?

According to the last reported balance sheet, Venture Life Group had liabilities of UK£10.00m due within 12 months, and liabilities of UK£10.6m due beyond 12 months. On the other hand, it had cash of UK£42.1m and UK£7.65m worth of receivables due within a year. So it actually has UK£29.2m more liquid assets than total liabilities.

This excess liquidity suggests that Venture Life Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Venture Life Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Venture Life Group grew its EBIT by 209% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Venture Life Group'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 Venture Life Group 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. Over the last three years, Venture Life Group reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Venture Life Group has net cash of UK£35.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 209% year-on-year EBIT growth. So is Venture Life Group's debt a risk? It doesn't seem so to us. 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. Be aware that Venture Life Group is showing 2 warning signs in our investment analysis , and 1 of those is significant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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