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Vertiseit (STO:VERT B) Could Easily Take On More Debt

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, Vertiseit AB (publ) (STO:VERT B) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vertiseit

What Is Vertiseit's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Vertiseit had kr8.29m of debt, an increase on kr5.28m, over one year. However, its balance sheet shows it holds kr29.8m in cash, so it actually has kr21.5m net cash.

OM:VERT B Historical Debt, August 28th 2019
OM:VERT B Historical Debt, August 28th 2019

How Strong Is Vertiseit's Balance Sheet?

The latest balance sheet data shows that Vertiseit had liabilities of kr28.6m due within a year, and liabilities of kr5.83m falling due after that. Offsetting this, it had kr29.8m in cash and kr19.0m in receivables that were due within 12 months. So it actually has kr14.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Vertiseit could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vertiseit has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Vertiseit has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vertiseit will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vertiseit has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Vertiseit actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Vertiseit has kr22m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in kr12m. So is Vertiseit's debt a risk? It doesn't seem so to us. 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 Vertiseit's earnings per share history for free.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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