We Think VT (KOSDAQ:018290) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, VT Co., Ltd. (KOSDAQ:018290) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for VT

What Is VT's Debt?

As you can see below, at the end of September 2024, VT had ₩56.9b of debt, up from ₩26.6b a year ago. Click the image for more detail. However, it does have ₩112.4b in cash offsetting this, leading to net cash of ₩55.5b.

How Strong Is VT's Balance Sheet?

According to the last reported balance sheet, VT had liabilities of ₩105.1b due within 12 months, and liabilities of ₩17.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩112.4b as well as receivables valued at ₩46.2b due within 12 months. So it actually has ₩36.1b more liquid assets than total liabilities.

This surplus suggests that VT has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, VT boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that VT grew its EBIT by 199% over twelve months. That boost will make it even easier to pay down debt going forward. 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 VT 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. While VT has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, VT actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case VT has ₩55.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in ₩85b. 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. For instance, we've identified 1 warning sign for VT that you should be aware of.

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. 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.