Health Check: How Prudently Does Vectura Group (LON:VEC) Use 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 Vectura Group plc (LON:VEC) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Vectura Group

What Is Vectura Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Vectura Group had UK£5.00m of debt, an increase on UK£4.10m, over one year. However, it does have UK£81.9m in cash offsetting this, leading to net cash of UK£76.9m.

How Healthy Is Vectura Group's Balance Sheet?

We can see from the most recent balance sheet that Vectura Group had liabilities of UK£59.1m falling due within a year, and liabilities of UK£51.9m due beyond that. Offsetting these obligations, it had cash of UK£81.9m as well as receivables valued at UK£35.0m due within 12 months. So it actually has UK£5.90m more liquid assets than total liabilities.

Having regard to Vectura Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£683.2m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Vectura Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Vectura Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Vectura Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.3%, to UK£176m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Vectura Group?

Although Vectura Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£22m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Vectura Group insider transactions.

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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