Is VIQ Solutions (TSE:VQS) A Risky Investment?

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, VIQ Solutions Inc. (TSE:VQS) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for VIQ Solutions

What Is VIQ Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 VIQ Solutions had US$9.68m of debt, an increase on US$8.61m, over one year. However, because it has a cash reserve of US$2.51m, its net debt is less, at about US$7.16m.

How Healthy Is VIQ Solutions' Balance Sheet?

We can see from the most recent balance sheet that VIQ Solutions had liabilities of US$9.50m falling due within a year, and liabilities of US$11.4m due beyond that. Offsetting these obligations, it had cash of US$2.51m as well as receivables valued at US$6.10m due within 12 months. So its liabilities total US$12.3m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$11.2m, we think shareholders really should watch VIQ Solutions's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 VIQ Solutions'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.

In the last year VIQ Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$44m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though VIQ Solutions managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$11m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$5.4m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. 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 5 warning signs for VIQ Solutions (of which 2 are potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.