Is Vmoto (ASX:VMT) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Vmoto Limited (ASX:VMT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vmoto

What Is Vmoto's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Vmoto had debt of AU$3.77m, up from none in one year. But it also has AU$41.7m in cash to offset that, meaning it has AU$38.0m net cash.

How Healthy Is Vmoto's Balance Sheet?

The latest balance sheet data shows that Vmoto had liabilities of AU$19.1m due within a year, and liabilities of AU$1.51m falling due after that. On the other hand, it had cash of AU$41.7m and AU$6.69m worth of receivables due within a year. So it actually has AU$27.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Vmoto's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Vmoto boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vmoto 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.

Over 12 months, Vmoto made a loss at the EBIT level, and saw its revenue drop to AU$51m, which is a fall of 50%. To be frank that doesn't bode well.

So How Risky Is Vmoto?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Vmoto lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$7.6m and booked a AU$603k accounting loss. Given it only has net cash of AU$38.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Vmoto .

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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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.