Is Vmoto (ASX:VMT) Using Too Much Debt?

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 can see that Vmoto Limited (ASX:VMT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Vmoto

What Is Vmoto's Debt?

As you can see below, at the end of June 2020, Vmoto had AU$2.06m of debt, up from AU$1.04m a year ago. Click the image for more detail. But on the other hand it also has AU$7.39m in cash, leading to a AU$5.33m net cash position.

How Healthy Is Vmoto's Balance Sheet?

The latest balance sheet data shows that Vmoto had liabilities of AU$8.21m due within a year, and liabilities of AU$453.6k falling due after that. Offsetting this, it had AU$7.39m in cash and AU$4.22m in receivables that were due within 12 months. So it can boast AU$2.96m more liquid assets than total liabilities.

This surplus suggests that Vmoto has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vmoto has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Vmoto turned things around in the last 12 months, delivering and EBIT of AU$1.3m. There's no doubt that we learn most about debt from the balance sheet. But it is Vmoto's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vmoto has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Vmoto actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Vmoto has AU$5.33m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of AU$3.1m, being 245% of its EBIT. So is Vmoto's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Vmoto that you should be aware of.

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. 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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