Here's Why Vysarn (ASX:VYS) Can Manage Its Debt Responsibly

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 can see that Vysarn Limited (ASX:VYS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Vysarn

What Is Vysarn's Debt?

The image below, which you can click on for greater detail, shows that Vysarn had debt of AU$5.48m at the end of December 2023, a reduction from AU$10.6m over a year. However, its balance sheet shows it holds AU$7.17m in cash, so it actually has AU$1.69m net cash.

A Look At Vysarn's Liabilities

The latest balance sheet data shows that Vysarn had liabilities of AU$15.2m due within a year, and liabilities of AU$9.23m falling due after that. Offsetting these obligations, it had cash of AU$7.17m as well as receivables valued at AU$8.67m due within 12 months. So it has liabilities totalling AU$8.56m more than its cash and near-term receivables, combined.

Of course, Vysarn has a market capitalization of AU$102.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Vysarn boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Vysarn grew its EBIT by 317% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vysarn's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vysarn may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Vysarn's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Vysarn's liabilities, but we can be reassured by the fact it has has net cash of AU$1.69m. And we liked the look of last year's 317% year-on-year EBIT growth. So we don't think Vysarn's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Vysarn .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.