Is Vection Technologies (ASX:VR1) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Vection Technologies Limited (ASX:VR1) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that VR1 is potentially overvalued!

How Much Debt Does Vection Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that Vection Technologies had AU$3.61m of debt in June 2022, down from AU$4.22m, one year before. But it also has AU$14.9m in cash to offset that, meaning it has AU$11.3m net cash.

A Look At Vection Technologies' Liabilities

The latest balance sheet data shows that Vection Technologies had liabilities of AU$8.48m due within a year, and liabilities of AU$3.75m falling due after that. Offsetting these obligations, it had cash of AU$14.9m as well as receivables valued at AU$5.89m due within 12 months. So it actually has AU$8.53m 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 it is Vection Technologies'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.

Over 12 months, Vection Technologies reported revenue of AU$18m, which is a gain of 457%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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$3.2m of cash and made a loss of AU$6.7m. Given it only has net cash of AU$11.3m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Vection Technologies has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Vection Technologies (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.