These 4 Measures Indicate That Virtualex Holdings (TSE:6193) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Virtualex Holdings, Inc. (TSE:6193) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Our free stock report includes 2 warning signs investors should be aware of before investing in Virtualex Holdings. Read for free now.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

What Is Virtualex Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Virtualex Holdings had JP¥1.02b of debt, an increase on JP¥741.0m, over one year. But on the other hand it also has JP¥1.33b in cash, leading to a JP¥304.0m net cash position.

How Strong Is Virtualex Holdings' Balance Sheet?

We can see from the most recent balance sheet that Virtualex Holdings had liabilities of JP¥1.57b falling due within a year, and liabilities of JP¥472.0m due beyond that. On the other hand, it had cash of JP¥1.33b and JP¥1.15b worth of receivables due within a year. So it actually has JP¥431.0m more liquid assets than total liabilities.

This excess liquidity suggests that Virtualex Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Virtualex Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Virtualex Holdings

It is just as well that Virtualex Holdings's load is not too heavy, because its EBIT was down 37% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Virtualex Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Virtualex Holdings 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. In the last three years, Virtualex Holdings's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Virtualex Holdings has net cash of JP¥304.0m, as well as more liquid assets than liabilities. So we don't have any problem with Virtualex Holdings's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Virtualex Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.