Is VC (KOSDAQ:365900) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, VC Inc. (KOSDAQ:365900) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for VC

What Is VC's Net Debt?

The chart below, which you can click on for greater detail, shows that VC had ₩35.1b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of ₩10.00b, its net debt is less, at about ₩25.1b.

How Healthy Is VC's Balance Sheet?

According to the last reported balance sheet, VC had liabilities of ₩41.8b due within 12 months, and liabilities of ₩7.39b due beyond 12 months. Offsetting this, it had ₩10.00b in cash and ₩4.52b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩34.7b.

This deficit casts a shadow over the ₩21.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, VC would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is VC'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 VC had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩38b. We would much prefer see growth.

Caveat Emptor

Not only did VC's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩7.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₩8.6b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Be aware that VC is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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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.