VBG Group (STO:VBG B) Has A Rock Solid 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.' 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. We can see that VBG Group AB (publ) (STO:VBG B) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for VBG Group

What Is VBG Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 VBG Group had debt of kr738.9m, up from kr437.8m in one year. However, it does have kr1.03b in cash offsetting this, leading to net cash of kr291.6m.

How Strong Is VBG Group's Balance Sheet?

We can see from the most recent balance sheet that VBG Group had liabilities of kr830.3m falling due within a year, and liabilities of kr1.54b due beyond that. Offsetting these obligations, it had cash of kr1.03b as well as receivables valued at kr1.13b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr210.6m.

Having regard to VBG Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr11.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, VBG Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, VBG Group grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that VBG Group has kr291.6m in net cash. And it impressed us with its EBIT growth of 75% over the last year. So is VBG Group's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for VBG Group you should know about.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com