These 4 metrics indicate that Vertoz Advertising (NSE: VERTOZ) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a 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. We can see that Vertoz Advertising Limited (NSE: VERTOZ) uses debt in its business. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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 business’s debt levels is to consider its cash flow and debt together.
See our latest review for Vertoz Advertising
What is Vertoz Advertising’s debt?
The image below, which you can click for more details, shows that in September 2021, Vertoz Advertising was owed 123.1m in debt, up from â¹ 116.1m in a year. However, given that it has a cash reserve of 31.5 million euros, its net debt is less, at around 91.5 million euros.
Is Vertoz Advertising’s balance sheet healthy?
According to the latest published balance sheet, Vertoz Advertising had liabilities of 232.9m at 12 months and liabilities of 28.0m â¹ due beyond 12 months. In return, he had 31.5 million in cash and 279.5 million in receivables due within 12 months. So he actually â¹ 50.1m Following liquid assets as total liabilities.
This surplus suggests that Vertoz Advertising has a conservative balance sheet, and could probably eliminate its debt without too much difficulty.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Vertoz Advertising has net debt of just 0.84 times EBITDA, indicating that he is certainly not a reckless borrower. And this view is underpinned by the strong interest coverage, with EBIT standing at 8.5 times last year’s interest expense. Even more impressively, Vertoz Advertising increased its EBIT by 1270% year over year. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious place to start. But it is the results of Vertoz Advertising that will influence the performance of the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business can only repay its debts with hard cash, not with accounting profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Vertoz Advertising has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
The good news is that Vertoz Advertising’s demonstrated ability to increase EBIT thrills us like a fluffy puppy does a toddler. But we have to admit that its conversion from EBIT to free cash flow has the opposite effect. Looking at all of the above factors together, it seems to us that Vertoz Advertising can manage its debt quite comfortably. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Vertoz Advertising which you need to know before investing here.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.