Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Venator Materials PLC (NYSE:VNTR) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Venator Materials Carry?
The image below, which you can click on for greater detail, shows that at March 2021 Venator Materials had debt of US$967.0m, up from US$823.0m in one year. However, it also had US$187.0m in cash, and so its net debt is US$780.0m.NYSE:VNTR Debt to Equity History June 29th 2021
A Look At Venator Materials' Liabilities
According to the last reported balance sheet, Venator Materials had liabilities of US$418.0m due within 12 months, and liabilities of US$1.32b due beyond 12 months. On the other hand, it had cash of US$187.0m and US$366.0m worth of receivables due within a year. So its liabilities total US$1.18b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$511.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Venator Materials would likely require a major re-capitalisation if it had to pay its creditors today. 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 Venator Materials can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Venator Materials made a loss at the EBIT level, and saw its revenue drop to US$2.0b, which is a fall of 6.7%. We would much prefer see growth.
Over the last twelve months Venator Materials produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$12m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$140m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Venator Materials's profit, revenue, and operating cashflow have changed over the last few years.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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