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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Vection Technologies Limited (ASX:VR1) makes use of debt. 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. 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. 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

How Much Debt Does Vection Technologies Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Vection Technologies had debt of AU$10.3m, up from AU$3.61m in one year. However, its balance sheet shows it holds AU$11.4m in cash, so it actually has AU$1.05m net cash.

A Look At Vection Technologies' Liabilities

The latest balance sheet data shows that Vection Technologies had liabilities of AU$19.4m due within a year, and liabilities of AU$3.53m falling due after that. On the other hand, it had cash of AU$11.4m and AU$13.1m worth of receivables due within a year. So it actually has AU$1.59m more liquid assets than total liabilities.

This surplus suggests that Vection Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 you can't view debt in total isolation; since Vection Technologies 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.

In the last year Vection Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to AU$26m. 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$11m and booked a AU$11m accounting loss. Given it only has net cash of AU$1.05m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Vection Technologies may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Vection Technologies is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

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.

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

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.