Vicinity Motor (CVE:VMC) Is Carrying A Fair Bit Of 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. Importantly, Vicinity Motor Corp. (CVE:VMC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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.

View our latest analysis for Vicinity Motor

What Is Vicinity Motor's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Vicinity Motor had debt of CA$8.48m, up from CA$7.94m in one year. On the flip side, it has CA$1.28m in cash leading to net debt of about CA$7.19m.

A Look At Vicinity Motor's Liabilities

The latest balance sheet data shows that Vicinity Motor had liabilities of CA$24.1m due within a year, and liabilities of CA$534.0k falling due after that. Offsetting these obligations, it had cash of CA$1.28m as well as receivables valued at CA$4.15m due within 12 months. So its liabilities total CA$19.2m more than the combination of its cash and short-term receivables.

Of course, Vicinity Motor has a market capitalization of CA$234.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vicinity Motor will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Vicinity Motor wasn't profitable at an EBIT level, but managed to grow its revenue by 5.8%, to CA$26m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Vicinity Motor produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$4.3m. 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. Another cause for caution is that is bled CA$9.1m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Vicinity Motor (2 are significant!) that you should be aware of before investing here.

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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