Health Check: How Prudently Does Victory Offices (ASX:VOL) 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. Importantly, Victory Offices Limited (ASX:VOL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Victory Offices

How Much Debt Does Victory Offices Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Victory Offices had AU$2.63m of debt, an increase on none, over one year. However, it does have AU$4.42m in cash offsetting this, leading to net cash of AU$1.79m.

A Look At Victory Offices' Liabilities

We can see from the most recent balance sheet that Victory Offices had liabilities of AU$26.9m falling due within a year, and liabilities of AU$187.5m due beyond that. Offsetting this, it had AU$4.42m in cash and AU$2.93m in receivables that were due within 12 months. So it has liabilities totalling AU$207.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$21.3m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Victory Offices would probably need a major re-capitalization if its creditors were to demand repayment. Victory Offices 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 Victory Offices'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.

It seems likely shareholders hope that Victory Offices can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Victory Offices?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Victory Offices had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$10m of cash and made a loss of AU$29m. Given it only has net cash of AU$1.79m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 example, we've discovered 3 warning signs for Victory Offices (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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