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, VERBIO Vereinigte BioEnergie AG (ETR:VBK) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is VERBIO Vereinigte BioEnergie's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 VERBIO Vereinigte BioEnergie had debt of €9.10m, up from €385.0k in one year. However, it does have €114.1m in cash offsetting this, leading to net cash of €105.0m.
How Strong Is VERBIO Vereinigte BioEnergie's Balance Sheet?
According to the last reported balance sheet, VERBIO Vereinigte BioEnergie had liabilities of €87.6m due within 12 months, and liabilities of €6.83m due beyond 12 months. Offsetting this, it had €114.1m in cash and €34.9m in receivables that were due within 12 months. So it can boast €54.6m more liquid assets than total liabilities.
This surplus suggests that VERBIO Vereinigte BioEnergie has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, VERBIO Vereinigte BioEnergie boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that VERBIO Vereinigte BioEnergie grew its EBIT by 183% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine VERBIO Vereinigte BioEnergie's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. VERBIO Vereinigte BioEnergie may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, VERBIO Vereinigte BioEnergie produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case VERBIO Vereinigte BioEnergie has €105m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 183% over the last year. So we don't think VERBIO Vereinigte BioEnergie's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of VERBIO Vereinigte BioEnergie's earnings per share history for free.
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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