Vibe Growth (CSE:VIBE) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Vibe Growth Corporation (CSE:VIBE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Vibe Growth

How Much Debt Does Vibe Growth Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Vibe Growth had US$1.57m of debt, an increase on US$1.17m, over one year. However, its balance sheet shows it holds US$13.4m in cash, so it actually has US$11.8m net cash.

How Healthy Is Vibe Growth's Balance Sheet?

We can see from the most recent balance sheet that Vibe Growth had liabilities of US$5.20m falling due within a year, and liabilities of US$3.29m due beyond that. Offsetting these obligations, it had cash of US$13.4m as well as receivables valued at US$29.1k due within 12 months. So it can boast US$4.94m more liquid assets than total liabilities.

This surplus suggests that Vibe Growth has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vibe Growth has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Vibe Growth made a loss at the EBIT level, last year, it was also good to see that it generated US$2.5m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Vibe Growth may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Vibe Growth recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Vibe Growth has US$11.8m in net cash and a decent-looking balance sheet. So we are not troubled with Vibe Growth's debt use. 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 instance, we've identified 3 warning signs for Vibe Growth that you should be aware of.

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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