Vection Technologies (ASX:VR1) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its 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 as of December 2021 Vection Technologies had AU$3.89m of debt, an increase on AU$870.6k, over one year. However, its balance sheet shows it holds AU$20.2m in cash, so it actually has AU$16.3m net cash.

How Healthy Is Vection Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vection Technologies had liabilities of AU$12.2m due within 12 months and liabilities of AU$5.39m due beyond that. Offsetting these obligations, it had cash of AU$20.2m as well as receivables valued at AU$4.92m due within 12 months. So it actually has AU$7.61m 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. Simply put, the fact that Vection Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vection Technologies's earnings that will influence how the balance sheet holds up in the future. 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 561%, to AU$12m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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 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$445k of cash and made a loss of AU$3.1m. Given it only has net cash of AU$16.3m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Vection Technologies's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 4 warning signs we've spotted with Vection Technologies (including 1 which is potentially serious) .

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.

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.