Health Check: How Prudently Does Venator Materials (NYSE:VNTR) Use 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 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 Venator Materials PLC (NYSE:VNTR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Venator Materials

How Much Debt Does Venator Materials Carry?

The chart below, which you can click on for greater detail, shows that Venator Materials had US$971.0m in debt in June 2021; about the same as the year before. On the flip side, it has US$182.0m in cash leading to net debt of about US$789.0m.

How Healthy Is Venator Materials' Balance Sheet?

We can see from the most recent balance sheet that Venator Materials had liabilities of US$434.0m falling due within a year, and liabilities of US$1.31b due beyond that. Offsetting these obligations, it had cash of US$182.0m as well as receivables valued at US$401.0m due within 12 months. So it has liabilities totalling US$1.16b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$289.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Venator Materials would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Venator Materials 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.

In the last year Venator Materials wasn't profitable at an EBIT level, but managed to grow its revenue by 4.7%, to US$2.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Venator Materials produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$5.0m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$20m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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 Venator Materials .

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.
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