Victrex (LON:VCT) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Victrex plc (LON:VCT) does carry debt. But is this debt a concern to shareholders?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Victrex

What Is Victrex's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Victrex had UK£22.5m of debt, an increase on UK£5.90m, over one year. But on the other hand it also has UK£68.8m in cash, leading to a UK£46.3m net cash position.

How Strong Is Victrex's Balance Sheet?

According to the last reported balance sheet, Victrex had liabilities of UK£84.6m due within 12 months, and liabilities of UK£66.4m due beyond 12 months. Offsetting this, it had UK£68.8m in cash and UK£55.9m in receivables that were due within 12 months. So its liabilities total UK£26.3m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Victrex's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the UK£1.58b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Victrex boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Victrex grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Victrex 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. Victrex may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Victrex recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Victrex's liabilities, but we can be reassured by the fact it has has net cash of UK£46.3m. So we don't think Victrex's use of debt is risky. 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. Be aware that Victrex is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.