Health Check: How Prudently Does Viva Leisure (ASX:VVA) Use Debt?

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. As with many other companies Viva Leisure Limited (ASX:VVA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for Viva Leisure

What Is Viva Leisure's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Viva Leisure had debt of AU$14.5m, up from AU$7.62m in one year. However, its balance sheet shows it holds AU$16.4m in cash, so it actually has AU$1.84m net cash.

A Look At Viva Leisure's Liabilities

According to the last reported balance sheet, Viva Leisure had liabilities of AU$40.1m due within 12 months, and liabilities of AU$293.8m due beyond 12 months. On the other hand, it had cash of AU$16.4m and AU$2.67m worth of receivables due within a year. So it has liabilities totalling AU$314.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$103.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Viva Leisure would likely require a major re-capitalisation if it had to pay its creditors today. Viva Leisure 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 it is future earnings, more than anything, that will determine Viva Leisure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Viva Leisure wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to AU$81m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Viva Leisure?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Viva Leisure 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$2.0m and booked a AU$14m accounting loss. Given it only has net cash of AU$1.84m, the company may need to raise more capital if it doesn't reach break-even soon. Viva Leisure's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for Viva Leisure (1 is a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.