Is VOTI Detection (CVE:VOTI) Using Debt In A Risky Way?

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 VOTI Detection Inc. (CVE:VOTI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for VOTI Detection

How Much Debt Does VOTI Detection Carry?

You can click the graphic below for the historical numbers, but it shows that VOTI Detection had CA$4.65m of debt in July 2021, down from CA$6.21m, one year before. However, it does have CA$3.29m in cash offsetting this, leading to net debt of about CA$1.36m.

How Healthy Is VOTI Detection's Balance Sheet?

The latest balance sheet data shows that VOTI Detection had liabilities of CA$11.6m due within a year, and liabilities of CA$6.27m falling due after that. On the other hand, it had cash of CA$3.29m and CA$3.45m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$11.1m.

This deficit is considerable relative to its market capitalization of CA$12.2m, so it does suggest shareholders should keep an eye on VOTI Detection's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if VOTI Detection can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, VOTI Detection reported revenue of CA$23m, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, VOTI Detection had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$3.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CA$7.2m. So we do think this stock is quite 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 instance, we've identified 4 warning signs for VOTI Detection (2 don't sit too well with us) you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.