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.' 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. We note that Vista Group International Limited (NZSE:VGL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Vista Group International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Vista Group International had NZ$21.3m of debt, an increase on NZ$11.9m, over one year. But it also has NZ$96.0m in cash to offset that, meaning it has NZ$74.7m net cash.
How Healthy Is Vista Group International's Balance Sheet?
According to the last reported balance sheet, Vista Group International had liabilities of NZ$50.4m due within 12 months, and liabilities of NZ$42.8m due beyond 12 months. Offsetting this, it had NZ$96.0m in cash and NZ$34.7m in receivables that were due within 12 months. So it actually has NZ$37.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Vista Group International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vista Group International 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 future earnings, more than anything, that will determine Vista Group International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Vista Group International made a loss at the EBIT level, and saw its revenue drop to NZ$122m, which is a fall of 12%. We would much prefer see growth.
So How Risky Is Vista Group International?
Although Vista Group International had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NZ$8.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 2 warning signs for Vista Group International 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.
When trading Vista Group International or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.