The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Venture Life Group Plc (LON:VLG) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Venture Life Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Venture Life Group had UK£3.84m of debt in December 2018, down from UK£11.4m, one year before. However, it does have UK£9.62m in cash offsetting this, leading to net cash of UK£5.78m.
A Look At Venture Life Group's Liabilities
We can see from the most recent balance sheet that Venture Life Group had liabilities of UK£6.78m falling due within a year, and liabilities of UK£6.79m due beyond that. Offsetting this, it had UK£9.62m in cash and UK£6.87m in receivables that were due within 12 months. So it actually has UK£2.93m more liquid assets than total liabilities.
This surplus suggests that Venture Life Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Venture Life Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, Venture Life Group's EBIT launched higher than Elon Musk, gaining a whopping 110% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Venture Life Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Venture Life Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Venture Life Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Venture Life Group has net cash of UK£5.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 110% over the last year. So we are not troubled with Venture Life Group's debt use. We'd be motivated to research the stock further if we found out that Venture Life Group insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.