Is Valamar Riviera d.d (ZGSE:RIVP) A Risky Investment?

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.' 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 can see that Valamar Riviera d.d. (ZGSE:RIVP) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Valamar Riviera d.d

What Is Valamar Riviera d.d's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Valamar Riviera d.d had Kn3.37b of debt, an increase on Kn2.62b, over one year. However, it does have Kn848.9m in cash offsetting this, leading to net debt of about Kn2.52b.

How Strong Is Valamar Riviera d.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Valamar Riviera d.d had liabilities of Kn747.4m due within 12 months and liabilities of Kn3.28b due beyond that. Offsetting this, it had Kn848.9m in cash and Kn25.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn3.16b.

This deficit is considerable relative to its market capitalization of Kn3.58b, so it does suggest shareholders should keep an eye on Valamar Riviera d.d's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Valamar Riviera d.d's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Valamar Riviera d.d had a loss before interest and tax, and actually shrunk its revenue by 64%, to Kn766m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Valamar Riviera d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable Kn444m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled Kn540m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Valamar Riviera d.d is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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