Is Virtualtek (KOSDAQ:036620) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Virtualtek Corp (KOSDAQ:036620) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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 Virtualtek

How Much Debt Does Virtualtek Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Virtualtek had debt of ₩11.3b, up from ₩10.1b in one year. But on the other hand it also has ₩12.8b in cash, leading to a ₩1.52b net cash position.

How Healthy Is Virtualtek's Balance Sheet?

We can see from the most recent balance sheet that Virtualtek had liabilities of ₩15.6b falling due within a year, and liabilities of ₩2.02b due beyond that. Offsetting these obligations, it had cash of ₩12.8b as well as receivables valued at ₩3.95b due within 12 months. So its liabilities total ₩855.9m more than the combination of its cash and short-term receivables.

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 while it's hard to imagine that the ₩48.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Virtualtek boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Virtualtek will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Virtualtek wasn't profitable at an EBIT level, but managed to grow its revenue by 193%, to ₩14b. So there's no doubt that shareholders are cheering for growth

So How Risky Is Virtualtek?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Virtualtek had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩8.3b and booked a ₩6.5b accounting loss. But at least it has ₩1.52b on the balance sheet to spend on growth, near-term. Importantly, Virtualtek's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Virtualtek is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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