These 4 Measures Indicate That Vitzro Tech (KOSDAQ:042370) Is Using Debt Reasonably Well

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.' 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. As with many other companies Vitzro Tech Co. Ltd (KOSDAQ:042370) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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.

View our latest analysis for Vitzro Tech

What Is Vitzro Tech's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Vitzro Tech had debt of ₩42.2b, up from ₩26.1b in one year. But it also has ₩59.2b in cash to offset that, meaning it has ₩16.9b net cash.

A Look At Vitzro Tech's Liabilities

We can see from the most recent balance sheet that Vitzro Tech had liabilities of ₩107.1b falling due within a year, and liabilities of ₩23.3b due beyond that. Offsetting this, it had ₩59.2b in cash and ₩69.5b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Vitzro Tech's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩191.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Vitzro Tech also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Vitzro Tech grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Vitzro Tech's earnings that will influence how the balance sheet holds up in the future. 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. Vitzro Tech 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. Looking at the most recent three years, Vitzro Tech recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about Vitzro Tech's liabilities, but we can be reassured by the fact it has has net cash of ₩16.9b. And we liked the look of last year's 24% year-on-year EBIT growth. So is Vitzro Tech's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Vitzro Tech, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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