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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 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. We can see that Verney-Carron S.A. (EPA:MLVER) does use debt in its business. But is this debt a concern to shareholders?
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 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 Verney-Carron
What Is Verney-Carron's Debt?
As you can see below, at the end of December 2018, Verney-Carron had €5.34m of debt, up from €3.32m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Verney-Carron's Balance Sheet?
We can see from the most recent balance sheet that Verney-Carron had liabilities of €6.55m falling due within a year, and liabilities of €1.04m due beyond that. Offsetting these obligations, it had cash of €37.0k as well as receivables valued at €1.40m due within 12 months. So its liabilities total €6.15m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's €4.98m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Verney-Carron will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Verney-Carron made a loss at the EBIT level, and saw its revenue drop to €11m, which is a fall of 18%. We would much prefer see growth.
Caveat Emptor
Not only did Verney-Carron's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €577k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of €368k didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. For riskier companies like Verney-Carron I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.