Does Vortiv (ASX:VOR) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Vortiv Limited (ASX:VOR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vortiv

How Much Debt Does Vortiv Carry?

As you can see below, at the end of March 2022, Vortiv had AU$22.3m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$23.2m in cash, leading to a AU$956.0k net cash position.

How Strong Is Vortiv's Balance Sheet?

We can see from the most recent balance sheet that Vortiv had liabilities of AU$37.3m falling due within a year, and liabilities of AU$8.31m due beyond that. Offsetting this, it had AU$23.2m in cash and AU$6.12m in receivables that were due within 12 months. So it has liabilities totalling AU$16.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$8.59m 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 definitely think shareholders need to watch this one closely. At the end of the day, Vortiv would probably need a major re-capitalization if its creditors were to demand repayment. Vortiv 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 Vortiv'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.

In the last year Vortiv managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Vortiv?

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 Vortiv lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$2.2m and booked a AU$2.7m accounting loss. Given it only has net cash of AU$956.0k, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Vortiv has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Vortiv (3 make us uncomfortable) you should be aware of.

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.