Is Vertex Energy (NASDAQ:VTNR) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Vertex Energy, Inc. (NASDAQ:VTNR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Vertex Energy

How Much Debt Does Vertex Energy Carry?

As you can see below, at the end of September 2022, Vertex Energy had US$318.5m of debt, up from US$14.5m a year ago. Click the image for more detail. However, it also had US$117.5m in cash, and so its net debt is US$201.1m.

How Strong Is Vertex Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vertex Energy had liabilities of US$272.0m due within 12 months and liabilities of US$255.2m due beyond that. Offsetting these obligations, it had cash of US$117.5m as well as receivables valued at US$51.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$357.9m.

Vertex Energy has a market capitalization of US$606.9m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vertex Energy 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.

In the last year Vertex Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 1,046%, to US$1.9b. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Vertex Energy's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$13m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$9.7m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Vertex Energy 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.