Is Voyageurs du Monde (EPA:ALVDM) Using Too Much Debt?

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. As with many other companies Voyageurs du Monde SA (EPA:ALVDM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Voyageurs du Monde

What Is Voyageurs du Monde's Debt?

The image below, which you can click on for greater detail, shows that Voyageurs du Monde had debt of €9.94m at the end of June 2019, a reduction from €12.2m over a year. However, its balance sheet shows it holds €155.4m in cash, so it actually has €145.5m net cash.

A Look At Voyageurs du Monde's Liabilities

We can see from the most recent balance sheet that Voyageurs du Monde had liabilities of €309.4m falling due within a year, and liabilities of €11.1m due beyond that. Offsetting these obligations, it had cash of €155.4m as well as receivables valued at €127.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €37.8m.

Since publicly traded Voyageurs du Monde shares are worth a total of €410.1m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Voyageurs du Monde also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Voyageurs du Monde has increased its EBIT by 5.3% over twelve months, which should ease any concerns about debt repayment. 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 Voyageurs du Monde 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. While Voyageurs du Monde has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Voyageurs du Monde actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Voyageurs du Monde's liabilities, but we can be reassured by the fact it has has net cash of €145.5m. And it impressed us with free cash flow of €27m, being 107% of its EBIT. So we don't think Voyageurs du Monde's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Voyageurs du Monde, you may well want to click here to check an interactive graph of its earnings per share history.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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