These 4 Measures Indicate That VBG Group (STO:VBG B) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, VBG Group AB (publ) (STO:VBG B) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for VBG Group

How Much Debt Does VBG Group Carry?

The chart below, which you can click on for greater detail, shows that VBG Group had kr813.4m in debt in March 2021; about the same as the year before. But it also has kr951.4m in cash to offset that, meaning it has kr138.0m net cash.

A Look At VBG Group's Liabilities

Zooming in on the latest balance sheet data, we can see that VBG Group had liabilities of kr489.4m due within 12 months and liabilities of kr1.40b due beyond that. Offsetting these obligations, it had cash of kr951.4m as well as receivables valued at kr570.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr367.7m.

Given VBG Group has a market capitalization of kr4.83b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, VBG Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that VBG Group saw its EBIT decline by 4.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine VBG Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. VBG Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, VBG Group produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about VBG Group's liabilities, but we can be reassured by the fact it has has net cash of kr138.0m. And it impressed us with free cash flow of kr341m, being 74% of its EBIT. So we don't think VBG Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with VBG Group .

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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This article by Simply Wall St is general in nature. 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.
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