Is VIS Containers Manufacturing (ATH:VIS) Using Too Much Debt?

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.' 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 VIS Containers Manufacturing Co. Ltd (ATH:VIS) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for VIS Containers Manufacturing

How Much Debt Does VIS Containers Manufacturing Carry?

The image below, which you can click on for greater detail, shows that VIS Containers Manufacturing had debt of €11.6m at the end of December 2020, a reduction from €13.0m over a year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is VIS Containers Manufacturing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VIS Containers Manufacturing had liabilities of €12.1m due within 12 months and liabilities of €12.8m due beyond that. On the other hand, it had cash of €12.0k and €3.92m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €21.0m.

This deficit casts a shadow over the €4.42m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, VIS Containers Manufacturing would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is VIS Containers Manufacturing's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year VIS Containers Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to €14m. That's not what we would hope to see.

Caveat Emptor

Importantly, VIS Containers Manufacturing had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €1.5m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost €2.2m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that VIS Containers Manufacturing is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

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. 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.
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