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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Vitzro Tech Co. Ltd (KOSDAQ:042370) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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 Vitzro Tech

What Is Vitzro Tech's Net Debt?

As you can see below, at the end of September 2020, Vitzro Tech had ₩42.4b of debt, up from ₩36.3b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩49.3b in cash, so it actually has ₩6.96b net cash.

How Healthy Is Vitzro Tech's Balance Sheet?

The latest balance sheet data shows that Vitzro Tech had liabilities of ₩106.1b due within a year, and liabilities of ₩23.3b falling due after that. Offsetting these obligations, it had cash of ₩49.3b as well as receivables valued at ₩82.0b 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 ₩264.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Vitzro Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Vitzro Tech has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Vitzro Tech's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Vitzro Tech has ₩6.96b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.3% in the last twelve months. So we are not troubled with Vitzro Tech's debt use. 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. We've identified 2 warning signs with Vitzro Tech , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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.
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