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. Importantly, VT Co., Ltd. (KOSDAQ:018290) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for VT
How Much Debt Does VT Carry?
As you can see below, VT had ₩24.6b of debt at December 2023, down from ₩47.4b a year prior. But it also has ₩64.8b in cash to offset that, meaning it has ₩40.2b net cash.
A Look At VT's Liabilities
The latest balance sheet data shows that VT had liabilities of ₩101.7b due within a year, and liabilities of ₩7.58b falling due after that. On the other hand, it had cash of ₩64.8b and ₩53.1b worth of receivables due within a year. So it can boast ₩8.59b more liquid assets than total liabilities.
Having regard to VT's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩796.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that VT has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, VT grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if VT can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. VT 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. Happily for any shareholders, VT actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to investigate a company's debt, in this case VT has ₩40.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩22b, being 126% of its EBIT. So we don't think VT's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for VT you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About KOSDAQ:A018290
Outstanding track record with flawless balance sheet.
