Is Vicinity Motor (CVE:VMC) 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 Vicinity Motor Corp. (CVE:VMC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vicinity Motor

How Much Debt Does Vicinity Motor Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Vicinity Motor had debt of US$12.6m, up from US$10.5m in one year. However, because it has a cash reserve of US$1.78m, its net debt is less, at about US$10.9m.

How Healthy Is Vicinity Motor's Balance Sheet?

We can see from the most recent balance sheet that Vicinity Motor had liabilities of US$16.9m falling due within a year, and liabilities of US$4.18m due beyond that. Offsetting this, it had US$1.78m in cash and US$3.55m in receivables that were due within 12 months. So its liabilities total US$15.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Vicinity Motor has a market capitalization of US$45.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Vicinity Motor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Vicinity Motor made a loss at the EBIT level, and saw its revenue drop to US$18m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Vicinity Motor's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$12m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$17m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Vicinity Motor (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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.

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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.