Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that TVA Group SA (VTX: VACN) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for the TVA Group
How much debt does the TVA group bear?
As you can see below, VAT Group had a debt of CHF 295.3 million in June 2021, up from CHF 334.1 million a year earlier. However, it has 87.8 million Swiss francs in cash offsetting this, which leads to a net debt of around 207.5 million Swiss francs.
How strong is the balance sheet of the TVA group?
The most recent balance sheet shows that the TVA Group had debts of CHF 223.1 million falling due within one year and debts of CHF 264.2 million beyond. In compensation for these obligations, he had cash of CHF 87.8 million as well as receivables valued at CHF 136.9 million within 12 months. Its liabilities therefore exceed the sum of its cash and (short-term) receivables by CHF 262.7 million.
Given that VAT Group has a massive market cap of CHF11.9b, it’s hard to believe that these liabilities pose a threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
VAT Group has a low debt to EBITDA ratio of just 0.86. And remarkably, despite her net debt, she actually received more interest in the past twelve months than she had to pay. So it’s fair to say he can handle debt like a hotshot teppanyaki chef handles the kitchen. In addition to this, we are pleased to report that the TVA Group has increased its EBIT by 52%, thus reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether VAT Group can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only repay its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, VAT Group has recorded free cash flow representing approximately 94% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
The TVA group’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! We believe that VAT Group is no more indebted to its lenders than the birds are to the bird watchers. For investment nerds like us, his record is almost charming. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for the TVA Group which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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