VisionaryholdingsLtd (TYO:9263) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, '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. We can see that Visionaryholdings Co.,Ltd. (TYO:9263) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for VisionaryholdingsLtd

What Is VisionaryholdingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2020 VisionaryholdingsLtd had JP¥6.52b of debt, an increase on JP¥6.23b, over one year. However, it also had JP¥6.07b in cash, and so its net debt is JP¥449.0m.

How Strong Is VisionaryholdingsLtd's Balance Sheet?

The latest balance sheet data shows that VisionaryholdingsLtd had liabilities of JP¥9.09b due within a year, and liabilities of JP¥5.62b falling due after that. Offsetting these obligations, it had cash of JP¥6.07b as well as receivables valued at JP¥1.46b due within 12 months. So it has liabilities totalling JP¥7.18b more than its cash and near-term receivables, combined.

VisionaryholdingsLtd has a market capitalization of JP¥14.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 0.40 times EBITDA, it is initially surprising to see that VisionaryholdingsLtd's EBIT has low interest coverage of 0.54 times. So one way or the other, it's clear the debt levels are not trivial. Shareholders should be aware that VisionaryholdingsLtd's EBIT was down 90% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since VisionaryholdingsLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, VisionaryholdingsLtd created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

To be frank both VisionaryholdingsLtd's interest cover and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Looking at the bigger picture, it seems clear to us that VisionaryholdingsLtd's use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. To that end, you should learn about the 3 warning signs we've spotted with VisionaryholdingsLtd (including 1 which is is significant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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