Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Vection Technologies Limited (ASX:VR1) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Vection Technologies's Net Debt?
The image below, which you can click on for greater detail, shows that Vection Technologies had debt of AU$3.61m at the end of June 2022, a reduction from AU$4.22m over a year. However, it does have AU$14.9m in cash offsetting this, leading to net cash of AU$11.3m.
How Strong Is Vection Technologies' Balance Sheet?
According to the last reported balance sheet, Vection Technologies had liabilities of AU$10.4m due within 12 months, and liabilities of AU$4.61m due beyond 12 months. On the other hand, it had cash of AU$14.9m and AU$6.24m worth of receivables due within a year. So it can boast AU$6.05m more liquid assets than total liabilities.
This surplus suggests that Vection Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vection Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vection Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Vection Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 440%, to AU$19m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Vection Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Vection Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$3.2m and booked a AU$5.2m accounting loss. Given it only has net cash of AU$11.3m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Vection Technologies has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Vection Technologies (of which 1 is significant!) you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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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