VIQ Solutions (TSE:VQS) Is Making Moderate Use Of Debt

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.' 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. Importantly, VIQ Solutions Inc. (TSE:VQS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for VIQ Solutions

What Is VIQ Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that VIQ Solutions had debt of US$8.61m at the end of March 2022, a reduction from US$13.5m over a year. However, because it has a cash reserve of US$3.72m, its net debt is less, at about US$4.89m.

A Look At VIQ Solutions' Liabilities

The latest balance sheet data shows that VIQ Solutions had liabilities of US$9.75m due within a year, and liabilities of US$11.1m falling due after that. Offsetting this, it had US$3.72m in cash and US$6.56m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.6m.

While this might seem like a lot, it is not so bad since VIQ Solutions has a market capitalization of US$34.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 5.7%, to US$34m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, VIQ Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$11m in negative free cash flow over the last twelve months. 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. 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 1 is potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.