VisionaryholdingsLtd (TYO:9263) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, '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 Visionaryholdings Co.,Ltd. (TYO:9263) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for VisionaryholdingsLtd

What Is VisionaryholdingsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that VisionaryholdingsLtd had debt of JP¥6.37b at the end of October 2020, a reduction from JP¥6.81b over a year. However, it does have JP¥6.44b in cash offsetting this, leading to net cash of JP¥71.0m.

How Healthy Is VisionaryholdingsLtd's Balance Sheet?

The latest balance sheet data shows that VisionaryholdingsLtd had liabilities of JP¥9.12b due within a year, and liabilities of JP¥5.54b falling due after that. Offsetting this, it had JP¥6.44b in cash and JP¥1.44b in receivables that were due within 12 months. So it has liabilities totalling JP¥6.77b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since VisionaryholdingsLtd has a market capitalization of JP¥16.7b, 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. Despite its noteworthy liabilities, VisionaryholdingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that VisionaryholdingsLtd's EBIT was down 75% 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. VisionaryholdingsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, VisionaryholdingsLtd produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While VisionaryholdingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥71.0m. So although we see some areas for improvement, we're not too worried about VisionaryholdingsLtd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that VisionaryholdingsLtd is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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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