Is Viva Leisure (ASX:VVA) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Viva Leisure Limited (ASX:VVA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Viva Leisure

What Is Viva Leisure's Net Debt?

As you can see below, at the end of December 2020, Viva Leisure had AU$7.62m of debt, up from AU$1.30m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$35.3m in cash, so it actually has AU$27.7m net cash.

A Look At Viva Leisure's Liabilities

According to the last reported balance sheet, Viva Leisure had liabilities of AU$36.2m due within 12 months, and liabilities of AU$237.9m due beyond 12 months. Offsetting these obligations, it had cash of AU$35.3m as well as receivables valued at AU$2.41m due within 12 months. So its liabilities total AU$236.4m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of AU$225.4m, we think shareholders really should watch Viva Leisure's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Viva Leisure has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Viva Leisure can strengthen its balance sheet over time. 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 33%, to AU$54m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Viva Leisure?

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 Viva Leisure had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$18m of cash and made a loss of AU$11m. Given it only has net cash of AU$27.7m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Viva Leisure may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Viva Leisure you should know about.

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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