These 4 Measures Indicate That VERBIO Vereinigte BioEnergie (ETR:VBK) Is Using Debt Reasonably Well

Simply Wall St

Wed, Feb 12, 2020, 11:13 PM 4 min read

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies VERBIO Vereinigte BioEnergie AG (ETR:VBK) makes use of 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for VERBIO Vereinigte BioEnergie

What Is VERBIO Vereinigte BioEnergie's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2019 VERBIO Vereinigte BioEnergie had debt of €30.1m, up from €7.96m in one year. However, it does have €84.2m in cash offsetting this, leading to net cash of €54.2m.

XTRA:VBK Historical Debt, February 13th 2020

How Healthy Is VERBIO Vereinigte BioEnergie's Balance Sheet?

According to the last reported balance sheet, VERBIO Vereinigte BioEnergie had liabilities of €86.2m due within 12 months, and liabilities of €49.4m due beyond 12 months. Offsetting these obligations, it had cash of €84.2m as well as receivables valued at €63.6m due within 12 months. So it actually has €12.2m more liquid assets than total liabilities.

This state of affairs indicates that VERBIO Vereinigte BioEnergie's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €814.0m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that VERBIO Vereinigte BioEnergie has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, VERBIO Vereinigte BioEnergie grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. In the last three years, VERBIO Vereinigte BioEnergie created free cash flow amounting to 7.0% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case VERBIO Vereinigte BioEnergie has €54.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 41% over the last year. So is VERBIO Vereinigte BioEnergie's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for VERBIO Vereinigte BioEnergie (of which 2 can't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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. Thank you for reading.

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