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. We note that Vicinity Motor Corp. (CVE:VMC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Vicinity Motor
How Much Debt Does Vicinity Motor Carry?
As you can see below, Vicinity Motor had CA$5.67m of debt at March 2021, down from CA$6.40m a year prior. However, because it has a cash reserve of CA$1.72m, its net debt is less, at about CA$3.95m.
How Strong Is Vicinity Motor's Balance Sheet?
The latest balance sheet data shows that Vicinity Motor had liabilities of CA$19.4m due within a year, and liabilities of CA$927.0k falling due after that. Offsetting these obligations, it had cash of CA$1.72m as well as receivables valued at CA$8.48m due within 12 months. So it has liabilities totalling CA$10.1m more than its cash and near-term receivables, combined.
Since publicly traded Vicinity Motor shares are worth a total of CA$247.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Vicinity Motor'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 Vicinity Motor wasn't profitable at an EBIT level, but managed to grow its revenue by 116%, to CA$49m. So its pretty obvious shareholders are hoping for more growth!
Caveat Emptor
Despite the top line growth, Vicinity Motor still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$478k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$10m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. We've identified 4 warning signs with Vicinity Motor (at least 2 which are concerning) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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.
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About TSXV:VMC
Vicinity Motor
Designs, builds, and distributes a suite of transit buses for public and commercial use under the Vicinity brand in the United States and Canada.
Slight with mediocre balance sheet.
