Is Vortex Consolidated Berhad (KLSE:VC) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Vortex Consolidated Berhad (KLSE:VC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Vortex Consolidated Berhad

What Is Vortex Consolidated Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Vortex Consolidated Berhad had RM62.4m in debt in September 2020; about the same as the year before. But on the other hand it also has RM94.8m in cash, leading to a RM32.3m net cash position.

A Look At Vortex Consolidated Berhad's Liabilities

The latest balance sheet data shows that Vortex Consolidated Berhad had liabilities of RM97.7m due within a year, and liabilities of RM53.1m falling due after that. Offsetting this, it had RM94.8m in cash and RM59.1m in receivables that were due within 12 months. So it actually has RM3.02m more liquid assets than total liabilities.

This short term liquidity is a sign that Vortex Consolidated Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vortex Consolidated Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Vortex Consolidated Berhad'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.

Over 12 months, Vortex Consolidated Berhad reported revenue of RM159m, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Vortex Consolidated Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Vortex Consolidated Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM11m and booked a RM5.3m accounting loss. With only RM32.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Vortex Consolidated Berhad (2 can't be ignored) you should be aware of.

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. 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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