Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Veoneer, Inc. (NYSE:VNE) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Veoneer's Net Debt?
As you can see below, Veoneer had US$161.0m of debt at March 2021, down from US$173.0m a year prior. But it also has US$644.0m in cash to offset that, meaning it has US$483.0m net cash.
How Healthy Is Veoneer's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Veoneer had liabilities of US$527.0m due within 12 months and liabilities of US$340.0m due beyond that. Offsetting this, it had US$644.0m in cash and US$289.0m in receivables that were due within 12 months. So it can boast US$66.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Veoneer could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Veoneer boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Veoneer 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.
Over 12 months, Veoneer made a loss at the EBIT level, and saw its revenue drop to US$1.4b, which is a fall of 19%. We would much prefer see growth.
So How Risky Is Veoneer?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Veoneer had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$379m and booked a US$416m accounting loss. However, it has net cash of US$483.0m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Veoneer , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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