Is Venator Materials (NYSE:VNTR) Using Debt In A Risky Way?

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. Importantly, Venator Materials PLC (NYSE:VNTR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Venator Materials

What Is Venator Materials's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Venator Materials had debt of US$967.0m, up from US$740.0m in one year. On the flip side, it has US$220.0m in cash leading to net debt of about US$747.0m.

A Look At Venator Materials' Liabilities

According to the last reported balance sheet, Venator Materials had liabilities of US$395.0m due within 12 months, and liabilities of US$1.34b due beyond 12 months. Offsetting these obligations, it had cash of US$220.0m as well as receivables valued at US$324.0m due within 12 months. So its liabilities total US$1.19b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$494.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Venator Materials would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Venator Materials'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.

Over 12 months, Venator Materials made a loss at the EBIT level, and saw its revenue drop to US$1.9b, which is a fall of 9.0%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Venator Materials produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.0m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$35m in negative free cash flow over the last year. That means it's on the risky side of things. 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 Venator Materials that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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