Here’s why Vertoz Advertising (NSE: VERTOZ) can responsibly manage debt

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. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Vertoz Limited Advertising (NSE: VERTOZ) uses debt. But does this debt worry shareholders?

Why Does Debt Bring Risk?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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 look at debt levels, we first consider both cash and debt levels.

Discover our latest analysis for Vertoz Advertising

What is Vertoz Advertising’s net debt?

The image below, which you can click for more details, shows that in March 2021 Vertoz Advertising was in debt of 123.5m, up from ₹ 104.9m in a year. On the other hand, it has 29.6 million euros in cash, leading to a net debt of around 93.9 million euros.

NSEI: VERTOZ History of debt to equity June 16, 2021

A look at the responsibilities of Vertoz Advertising

According to the last published balance sheet, Vertoz Advertising had liabilities of 230.3 million at 12 months and liabilities of 30.9 million due beyond 12 months. In compensation for these obligations, it had cash of 29.6 million as well as receivables valued at 232.5 million at 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.

This state of affairs indicates that Vertoz Advertising’s balance sheet looks quite strong, as its total liabilities roughly equal its cash. So while it’s hard to imagine the 2.35 billion yen company struggling to find cash, we still think it’s worth watching its balance sheet.

We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

While Vertoz Advertising’s low debt-to-EBITDA ratio of 0.76 suggests modest use of debt, the fact that EBIT only covered interest expense 6.6 times last year gives us pause. We therefore recommend that you keep a close eye on the impact of financing costs on the business. In addition, Vertoz Advertising has increased its EBIT by 83% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Vertoz Advertising will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. 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 recorded significant negative free cash flow overall. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

Our point of view

Fortunately, Vertoz Advertising’s impressive EBIT growth rate means that it has the upper hand over its debt. 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. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with Vertoz Advertising.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. 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 any of the stocks mentioned.
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