Victory Offices (ASX:VOL) Has Debt But No Earnings; Should You Worry?

By
Simply Wall St
Published
October 06, 2021
ASX:VOL
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Victory Offices

What Is Victory Offices's Net Debt?

As you can see below, at the end of June 2021, Victory Offices had AU$3.30m of debt, up from AU$2.57m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$15.1m in cash, so it actually has AU$11.8m net cash.

debt-equity-history-analysis
ASX:VOL Debt to Equity History October 7th 2021

How Strong Is Victory Offices' Balance Sheet?

We can see from the most recent balance sheet that Victory Offices had liabilities of AU$32.1m falling due within a year, and liabilities of AU$176.0m due beyond that. On the other hand, it had cash of AU$15.1m and AU$3.51m worth of receivables due within a year. So it has liabilities totalling AU$189.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the AU$28.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Victory Offices would likely require a major re-capitalisation if it had to pay its creditors today. Given that Victory Offices 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 you can't view debt in total isolation; since Victory Offices will need earnings to service that debt. 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.

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$11m of cash and made a loss of AU$37m. With only AU$11.8m 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 example Victory Offices has 4 warning signs (and 3 which are significant) we think you should know about.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.


Simply Wall St character - Warren

Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.