Is Virtualex Holdings (TSE:6193) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Virtualex Holdings, Inc. (TSE:6193) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Virtualex Holdings

What Is Virtualex Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Virtualex Holdings had debt of JP¥1.09b, up from JP¥747.0m in one year. But it also has JP¥1.40b in cash to offset that, meaning it has JP¥310.0m net cash.

A Look At Virtualex Holdings' Liabilities

The latest balance sheet data shows that Virtualex Holdings had liabilities of JP¥1.61b due within a year, and liabilities of JP¥533.0m falling due after that. Offsetting this, it had JP¥1.40b in cash and JP¥1.01b in receivables that were due within 12 months. So it actually has JP¥267.0m more liquid assets than total liabilities.

This surplus suggests that Virtualex Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Virtualex Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Virtualex Holdings's saving grace is its low debt levels, because its EBIT has tanked 63% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Virtualex Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Virtualex Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Virtualex Holdings recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Virtualex Holdings has JP¥310.0m in net cash and a decent-looking balance sheet. So we are not troubled with Virtualex Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Virtualex Holdings that you should be aware of before investing here.

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.