Is Victory Supermarket Chain (TLV:VCTR) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Victory Supermarket Chain Ltd (TLV:VCTR) does use debt in its business. 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. 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. 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.

Check out our latest analysis for Victory Supermarket Chain

How Much Debt Does Victory Supermarket Chain Carry?

The image below, which you can click on for greater detail, shows that Victory Supermarket Chain had debt of ₪49.5m at the end of September 2023, a reduction from ₪80.7m over a year. But on the other hand it also has ₪96.1m in cash, leading to a ₪46.6m net cash position.

A Look At Victory Supermarket Chain's Liabilities

Zooming in on the latest balance sheet data, we can see that Victory Supermarket Chain had liabilities of ₪549.2m due within 12 months and liabilities of ₪1.00b due beyond that. Offsetting this, it had ₪96.1m in cash and ₪211.6m in receivables that were due within 12 months. So it has liabilities totalling ₪1.24b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪695.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Victory Supermarket Chain would likely require a major re-capitalisation if it had to pay its creditors today. Victory Supermarket Chain boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Sadly, Victory Supermarket Chain's EBIT actually dropped 3.4% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Victory Supermarket Chain will need earnings to service that debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Victory Supermarket Chain actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Victory Supermarket Chain does have more liabilities than liquid assets, it also has net cash of ₪46.6m. The cherry on top was that in converted 156% of that EBIT to free cash flow, bringing in ₪146m. So while Victory Supermarket Chain does not have a great balance sheet, it's certainly not too bad. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Victory Supermarket Chain's earnings per share history for free.

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.