Health Check: How Prudently Does Vistal Gdynia (WSE:VTL) Use 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.' 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 note that Vistal Gdynia S.A. (WSE:VTL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vistal Gdynia

How Much Debt Does Vistal Gdynia Carry?

The image below, which you can click on for greater detail, shows that Vistal Gdynia had debt of zł6.23m at the end of September 2020, a reduction from zł92.9m over a year. However, it does have zł5.76m in cash offsetting this, leading to net debt of about zł466.0k.

How Healthy Is Vistal Gdynia's Balance Sheet?

The latest balance sheet data shows that Vistal Gdynia had liabilities of zł37.4m due within a year, and liabilities of zł73.1m falling due after that. On the other hand, it had cash of zł5.76m and zł31.7m worth of receivables due within a year. So it has liabilities totalling zł73.0m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the zł48.5m 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, Vistal Gdynia would probably need a major re-capitalization if its creditors were to demand repayment. Vistal Gdynia may have virtually no net debt, but it does have a lot of liabilities. 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 Vistal Gdynia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Vistal Gdynia wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to zł96m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Vistal Gdynia still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost zł1.1m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through zł22m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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 example, we've discovered 3 warning signs for Vistal Gdynia (1 is a bit concerning!) that you should be aware of before investing here.

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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