Is Victory Offices (ASX:VOL) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Victory Offices Limited (ASX:VOL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Victory Offices

What Is Victory Offices's Net Debt?

As you can see below, at the end of December 2021, Victory Offices had AU$7.88m of debt, up from AU$2.63m a year ago. Click the image for more detail. But on the other hand it also has AU$9.50m in cash, leading to a AU$1.63m net cash position.

A Look At Victory Offices' Liabilities

Zooming in on the latest balance sheet data, we can see that Victory Offices had liabilities of AU$28.8m due within 12 months and liabilities of AU$161.0m due beyond that. Offsetting these obligations, it had cash of AU$9.50m as well as receivables valued at AU$1.62m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$178.6m.

This deficit casts a shadow over the AU$17.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Victory Offices would likely require a major re-capitalisation if it had to pay its creditors today. 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 Victory Offices's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given it has no significant operating revenue at the moment, shareholders will be hoping Victory Offices can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Victory Offices?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Victory Offices lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$7.9m and booked a AU$45m accounting loss. With only AU$1.63m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 5 warning signs for Victory Offices (3 make us uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.