Health Check: How Prudently Does vimi fasteners (BIT:VIM) Use Debt?

Warren Buffett famously said, '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 vimi fasteners S.p.a. (BIT:VIM) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for vimi fasteners

How Much Debt Does vimi fasteners Carry?

As you can see below, vimi fasteners had €14.8m of debt at December 2020, down from €16.8m a year prior. However, it also had €6.78m in cash, and so its net debt is €8.00m.

How Healthy Is vimi fasteners' Balance Sheet?

We can see from the most recent balance sheet that vimi fasteners had liabilities of €9.68m falling due within a year, and liabilities of €21.8m due beyond that. On the other hand, it had cash of €6.78m and €9.64m worth of receivables due within a year. So it has liabilities totalling €15.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €16.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if vimi fasteners 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 vimi fasteners had a loss before interest and tax, and actually shrunk its revenue by 16%, to €39m. That's not what we would hope to see.

Caveat Emptor

While vimi fasteners's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €331k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €255k. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for vimi fasteners (1 shouldn't be ignored) you should be aware of.

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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