Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Volt Power Group Limited (ASX:VPR) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Volt Power Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Volt Power Group had AU$331.9k of debt in December 2018, down from AU$500.7k, one year before. However, it does have AU$1.23m in cash offsetting this, leading to net cash of AU$901.7k.
A Look At Volt Power Group's Liabilities
The latest balance sheet data shows that Volt Power Group had liabilities of AU$454.1k due within a year, and liabilities of AU$218.8k falling due after that. Offsetting these obligations, it had cash of AU$1.23m as well as receivables valued at AU$256.8k due within 12 months. So it can boast AU$817.5k more liquid assets than total liabilities.
This surplus suggests that Volt Power Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Volt Power Group 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 you can't view debt in total isolation; since Volt Power Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Volt Power Group managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
So How Risky Is Volt Power Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Volt Power Group had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of AU$1.6m and booked a AU$4.5m accounting loss. With only AU$1.2m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Volt Power Group has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 Volt Power Group's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.