Is Viaplay Group (STO:VPLAY B) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Viaplay Group AB (publ) (STO:VPLAY B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the SE Media industry.

How Much Debt Does Viaplay Group Carry?

The chart below, which you can click on for greater detail, shows that Viaplay Group had kr3.40b in debt in June 2022; about the same as the year before. However, it does have kr5.25b in cash offsetting this, leading to net cash of kr1.85b.

How Healthy Is Viaplay Group's Balance Sheet?

The latest balance sheet data shows that Viaplay Group had liabilities of kr8.84b due within a year, and liabilities of kr4.07b falling due after that. On the other hand, it had cash of kr5.25b and kr1.93b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr5.73b.

Viaplay Group has a market capitalization of kr19.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Viaplay Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Viaplay Group's load is not too heavy, because its EBIT was down 67% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Viaplay Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Viaplay Group 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. In the last three years, Viaplay Group's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Viaplay Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr1.85b. So although we see some areas for improvement, we're not too worried about Viaplay Group's balance sheet. 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. For instance, we've identified 1 warning sign for Viaplay Group that you should be aware of.

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.