Is Vibe Growth (CSE:VIBE) Using Too Much Debt?

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 can see that Vibe Growth Corporation (CSE:VIBE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vibe Growth

How Much Debt Does Vibe Growth Carry?

The image below, which you can click on for greater detail, shows that Vibe Growth had debt of US$1.55m at the end of June 2021, a reduction from US$1.64m over a year. However, its balance sheet shows it holds US$13.0m in cash, so it actually has US$11.4m net cash.

A Look At Vibe Growth's Liabilities

We can see from the most recent balance sheet that Vibe Growth had liabilities of US$7.70m falling due within a year, and liabilities of US$3.37m due beyond that. Offsetting this, it had US$13.0m in cash and US$222.2k in receivables that were due within 12 months. So it actually has US$2.15m more liquid assets than total liabilities.

This short term liquidity is a sign that Vibe Growth could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vibe Growth boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Vibe Growth grew its EBIT by 752% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vibe Growth's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vibe Growth has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Vibe Growth burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Vibe Growth has US$11.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 752% year-on-year EBIT growth. So we are not troubled with Vibe Growth's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Vibe Growth you should know about.

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. 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.
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