Health Check: How Prudently Does Vection Technologies (ASX:VR1) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Vection Technologies Limited (ASX:VR1) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vection Technologies

What Is Vection Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Vection Technologies had AU$3.42m of debt in December 2022, down from AU$3.89m, one year before. But on the other hand it also has AU$5.16m in cash, leading to a AU$1.74m net cash position.

A Look At Vection Technologies' Liabilities

We can see from the most recent balance sheet that Vection Technologies had liabilities of AU$12.4m falling due within a year, and liabilities of AU$3.40m due beyond that. Offsetting this, it had AU$5.16m in cash and AU$7.50m in receivables that were due within 12 months. So it has liabilities totalling AU$3.17m more than its cash and near-term receivables, combined.

Of course, Vection Technologies has a market capitalization of AU$66.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Vection Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vection Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Vection Technologies reported revenue of AU$17m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Vection Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Vection Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$6.9m of cash and made a loss of AU$13m. With only AU$1.74m on the balance sheet, it would appear that its going to need to raise capital again soon. Vection Technologies's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 4 warning signs for Vection Technologies (2 can't be ignored) 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.