VOTI Detection (CVE:VOTI) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies VOTI Detection Inc. (CVE:VOTI) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for VOTI Detection

What Is VOTI Detection's Net Debt?

The image below, which you can click on for greater detail, shows that VOTI Detection had debt of CA$4.65m at the end of July 2021, a reduction from CA$6.21m over a year. However, it also had CA$3.29m in cash, and so its net debt is CA$1.36m.

How Healthy Is VOTI Detection's Balance Sheet?

According to the last reported balance sheet, VOTI Detection had liabilities of CA$11.6m due within 12 months, and liabilities of CA$6.27m due beyond 12 months. Offsetting these obligations, it had cash of CA$3.29m as well as receivables valued at CA$3.45m due within 12 months. So its liabilities total CA$11.1m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$14.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine VOTI Detection's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year VOTI Detection wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CA$23m. We usually like to see faster growth from unprofitable companies, but each to their own.

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$4.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CA$7.2m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with VOTI Detection (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.