Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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. Importantly, VIS Containers Manufacturing Co. Ltd (ATH:VIS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is VIS Containers Manufacturing's Debt?
The image below, which you can click on for greater detail, shows that VIS Containers Manufacturing had debt of €13.1m at the end of June 2019, a reduction from €14.2m over a year. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is VIS Containers Manufacturing's Balance Sheet?
According to the last reported balance sheet, VIS Containers Manufacturing had liabilities of €11.4m due within 12 months, and liabilities of €13.9m due beyond 12 months. Offsetting these obligations, it had cash of €94.7k as well as receivables valued at €7.70m due within 12 months. So it has liabilities totalling €17.4m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €4.92m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, VIS Containers Manufacturing would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is VIS Containers Manufacturing's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, VIS Containers Manufacturing made a loss at the EBIT level, and saw its revenue drop to €14m, which is a fall of 25%. To be frank that doesn't bode well.
While VIS Containers Manufacturing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €2.5m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of €2.8m in the last year. So while it will probably survive, we think it's risky; we'd treat it like chicken pox and try to avoid it. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how VIS Containers Manufacturing's profit, revenue, and operating cashflow have changed over the last few years.
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.
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