David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Vistry SA Group (LON: VTY) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Vistry Group
What is the debt of the Vistry group?
The image below, which you can click for more details, shows Vistry Group owed £ 311.0million at the end of June 2021, a reduction from the £ 578.0million over a year. However, he has £ 342.6million in cash offsetting this, leading to a net cash of £ 31.6million.
A look at the responsibilities of the Vistry group
According to the latest published balance sheet, Vistry Group had debts of £ 934.5million due within 12 months and debts of £ 556.1million due beyond 12 months. In compensation for these obligations, it had cash of £ 342.6 million as well as receivables valued at £ 245.2 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by £ 902.8 million.
While that might sound like a lot, it’s not that big of a deal since Vistry Group has a market cap of £ 2.66bn, so it could likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky. While it has some liabilities to note, Vistry Group also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Best of all, Vistry Group increased its EBIT by 127% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine the ability of the Vistry Group to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. While Vistry Group has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past three years, Vistry Group has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
Although Vistry Group has more liabilities than liquid assets, it also has net cash of £ 31.6million. And he impressed us with free cash flow of £ 326million, or 115% of his EBIT. We therefore do not believe that the use of debt by Vistry Group is risky. The balance sheet is clearly the area 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 have identified 1 warning sign for Vistry Group that you need to be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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 the mentioned stocks.
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