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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Vortiv Limited (ASX:VOR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Vortiv Carry?
As you can see below, at the end of March 2022, Vortiv had AU$22.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$23.2m in cash, so it actually has AU$956.0k net cash.
How Healthy Is Vortiv's Balance Sheet?
According to the last reported balance sheet, Vortiv had liabilities of AU$37.3m due within 12 months, and liabilities of AU$8.31m due beyond 12 months. On the other hand, it had cash of AU$23.2m and AU$6.12m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$16.3m.
This deficit casts a shadow over the AU$10.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Vortiv would probably need a major re-capitalization if its creditors were to demand repayment. Vortiv boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vortiv will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
While it hasn't made a profit, at least Vortiv booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Vortiv?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Vortiv had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$2.2m and booked a AU$2.7m accounting loss. With only AU$956.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Vortiv's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Vortiv is showing 5 warning signs in our investment analysis , and 3 of those are potentially serious...
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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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.