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

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. As with many other companies Vection Technologies Limited (ASX:VR1) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vection Technologies

What Is Vection Technologies's Net Debt?

As you can see below, Vection Technologies had AU$3.42m of debt at December 2022, down from AU$3.89m a year prior. However, it does have AU$13.2m in cash offsetting this, leading to net cash of AU$9.74m.

How Strong Is Vection Technologies' Balance Sheet?

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$13.2m in cash and AU$7.50m in receivables that were due within 12 months. So it can boast AU$4.83m more liquid assets than total liabilities.

This short term liquidity is a sign that Vection Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 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.

In the last year Vection Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to AU$17m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Vection Technologies?

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 Vection Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$6.9m and booked a AU$13m accounting loss. With only AU$9.74m 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. 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 instance, we've identified 2 warning signs for Vection Technologies (1 doesn't sit too well with us) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.