Health Check: How Prudently Does Visioneering Technologies (ASX:VTI) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Visioneering Technologies, Inc. (ASX:VTI) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Visioneering Technologies

How Much Debt Does Visioneering Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that Visioneering Technologies had US$2.91m of debt in June 2021, down from US$3.91m, one year before. However, it does have US$15.1m in cash offsetting this, leading to net cash of US$12.2m.

How Strong Is Visioneering Technologies' Balance Sheet?

According to the last reported balance sheet, Visioneering Technologies had liabilities of US$4.57m due within 12 months, and liabilities of US$2.85m due beyond 12 months. Offsetting this, it had US$15.1m in cash and US$1.12m in receivables that were due within 12 months. So it can boast US$8.78m more liquid assets than total liabilities.

This excess liquidity is a great indication that Visioneering Technologies' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Visioneering Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Visioneering Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Visioneering Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$6.2m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Visioneering Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Visioneering Technologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$5.9m of cash and made a loss of US$5.6m. Given it only has net cash of US$12.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Visioneering Technologies is showing 4 warning signs in our investment analysis , and 1 of those can't be ignored...

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.
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