Would Vee (WSE:VEE) be better off with less debt?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Vee S.A. (WSE:VEE) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Vee
What is Vee’s debt?
The image below, which you can click on for more details, shows that in March 2022, Vee had a debt of 8.10 million zł, compared to 2.19 million zł in one year. However, since it has a cash reserve of 208.7 kzł, its net debt is lower, at around 7.89 million zł.
How strong is Vee’s balance sheet?
We can see from the most recent balance sheet that Vee had liabilities of 9.15 million zł due within a year, and liabilities of 3.53 million zł due beyond that. On the other hand, he had cash of 208.7 k zł and 6.96 million zł of receivables due within the year. It therefore has liabilities totaling zł 5.51 million more than its cash and short-term receivables, combined.
Given that Vee’s listed shares are worth a total of 49.7 million zł, it seems unlikely that this level of liabilities will pose a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it’s Vee’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Last year, Vee was not profitable in terms of EBIT, but managed to increase its turnover by 26%, to 2.1 million zł. With a little luck, the company will be able to progress towards profitability.
Over the past twelve months, Vee has posted a loss in earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to 4.6 million zł. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost zł 1.5 million of negative free cash flow over the past twelve months. So suffice it to say that we consider the stock to be risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Vee you should be aware, and 2 of them are a bit of a concern.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.