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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Versarien plc (LON:VRS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Versarien
How Much Debt Does Versarien Carry?
As you can see below, at the end of March 2022, Versarien had UK£4.92m of debt, up from UK£2.89m a year ago. Click the image for more detail. On the flip side, it has UK£3.10m in cash leading to net debt of about UK£1.83m.
How Healthy Is Versarien's Balance Sheet?
We can see from the most recent balance sheet that Versarien had liabilities of UK£3.38m falling due within a year, and liabilities of UK£6.02m due beyond that. Offsetting this, it had UK£3.10m in cash and UK£2.56m in receivables that were due within 12 months. So it has liabilities totalling UK£3.75m more than its cash and near-term receivables, combined.
Given Versarien has a market capitalization of UK£42.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Versarien'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 Versarien wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to UK£7.6m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Versarien had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£4.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£5.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Versarien has 5 warning signs (and 2 which are concerning) we think you should know about.
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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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.
About AIM:VRS
Versarien
Provides engineering solutions for various industry sectors in the United Kingdom, rest of Europe, North America, and internationally.
Moderate and slightly overvalued.
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