Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Vecima Networks Inc. (TSE:VCM) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Vecima Networks's Net Debt?
As you can see below, Vecima Networks had CA$2.04m of debt at March 2019, down from CA$2.29m a year prior. However, its balance sheet shows it holds CA$47.2m in cash, so it actually has CA$45.1m net cash.
How Healthy Is Vecima Networks's Balance Sheet?
According to the last reported balance sheet, Vecima Networks had liabilities of CA$16.1m due within 12 months, and liabilities of CA$2.98m due beyond 12 months. On the other hand, it had cash of CA$47.2m and CA$17.9m worth of receivables due within a year. So it can boast CA$46.0m more liquid assets than total liabilities.
This excess liquidity suggests that Vecima Networks is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Vecima Networks has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vecima Networks's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Vecima Networks managed to grow its revenue by 30%, to CA$89m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Vecima Networks?
Although Vecima Networks had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of CA$282k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 30% is a good sign. We'd see further strong growth as an optimistic indication. 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 Vecima Networks'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.
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