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.' 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. Importantly, Vianet Group plc (LON:VNET) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Vianet Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Vianet Group had UK£4.54m of debt, an increase on UK£2.68m, over one year. However, it does have UK£1.89m in cash offsetting this, leading to net debt of about UK£2.64m.
How Strong Is Vianet Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Vianet Group had liabilities of UK£4.58m due within 12 months and liabilities of UK£3.38m due beyond that. Offsetting these obligations, it had cash of UK£1.89m as well as receivables valued at UK£2.30m due within 12 months. So it has liabilities totalling UK£3.76m more than its cash and near-term receivables, combined.
Given Vianet Group has a market capitalization of UK£30.1m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Vianet Group 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.
In the last year Vianet Group had a loss before interest and tax, and actually shrunk its revenue by 49%, to UK£8.4m. To be frank that doesn't bode well.
Not only did Vianet Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at UK£2.5m. 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. However, it doesn't help that it burned through UK£1.6m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Vianet Group (1 shouldn't be ignored) you should be aware of.
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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