Is Virtualtek (KOSDAQ:036620) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Virtualtek Corp (KOSDAQ:036620) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Virtualtek

What Is Virtualtek's Debt?

As you can see below, at the end of September 2020, Virtualtek had ₩11.3b of debt, up from ₩10.1b a year ago. Click the image for more detail. But it also has ₩12.8b in cash to offset that, meaning it has ₩1.52b net cash.

How Healthy Is Virtualtek's Balance Sheet?

The latest balance sheet data shows that Virtualtek had liabilities of ₩15.6b due within a year, and liabilities of ₩2.02b falling due after that. On the other hand, it had cash of ₩12.8b and ₩3.95b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩855.9m.

This state of affairs indicates that Virtualtek's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩56.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Virtualtek also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Virtualtek'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.

In the last year Virtualtek wasn't profitable at an EBIT level, but managed to grow its revenue by 193%, to ₩14b. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Virtualtek?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Virtualtek had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩8.3b of cash and made a loss of ₩6.5b. But at least it has ₩1.52b on the balance sheet to spend on growth, near-term. The good news for shareholders is that Virtualtek has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Virtualtek , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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