Here's Why V Technology (TSE:7717) Can Manage Its Debt Responsibly

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 note that V Technology Co., Ltd. (TSE:7717) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is V Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 V Technology had debt of JP¥22.9b, up from JP¥21.6b in one year. But it also has JP¥26.2b in cash to offset that, meaning it has JP¥3.27b net cash.

A Look At V Technology's Liabilities

The latest balance sheet data shows that V Technology had liabilities of JP¥25.7b due within a year, and liabilities of JP¥16.5b falling due after that. Offsetting this, it had JP¥26.2b in cash and JP¥20.5b in receivables that were due within 12 months. So it actually has JP¥4.51b more liquid assets than total liabilities.

It's good to see that V Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that V Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for V Technology

It was also good to see that despite losing money on the EBIT line last year, V Technology turned things around in the last 12 months, delivering and EBIT of JP¥3.0b. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if V Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. V Technology 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 year, V Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that V Technology has net cash of JP¥3.27b, as well as more liquid assets than liabilities. So we are not troubled with V Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with V Technology .

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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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.