Does Victory Supermarket Chain (TLV:VCTR) Have A Healthy Balance Sheet?

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.' 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. We can see that Victory Supermarket Chain Ltd (TLV:VCTR) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Victory Supermarket Chain

What Is Victory Supermarket Chain's Debt?

You can click the graphic below for the historical numbers, but it shows that Victory Supermarket Chain had ₪34.3m of debt in September 2024, down from ₪49.5m, one year before. However, it does have ₪118.2m in cash offsetting this, leading to net cash of ₪83.9m.

A Look At Victory Supermarket Chain's Liabilities

We can see from the most recent balance sheet that Victory Supermarket Chain had liabilities of ₪607.0m falling due within a year, and liabilities of ₪1.19b due beyond that. On the other hand, it had cash of ₪118.2m and ₪244.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.43b.

The deficiency here weighs heavily on the ₪712.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Victory Supermarket Chain would probably need a major re-capitalization if its creditors were to demand repayment. Given that Victory Supermarket Chain has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Importantly, Victory Supermarket Chain grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Victory Supermarket Chain'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Victory Supermarket Chain has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Victory Supermarket Chain actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Victory Supermarket Chain's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪83.9m. And it impressed us with free cash flow of ₪176m, being 177% of its EBIT. So we are not troubled with Victory Supermarket Chain's debt use. 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. We've identified 1 warning sign with Victory Supermarket Chain , and understanding them should be part of your investment process.

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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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.