Health Check: How Prudently Does Vista Group International (NZSE:VGL) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Vista Group International Limited (NZSE:VGL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vista Group International

What Is Vista Group International's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Vista Group International had debt of NZ$18.1m, up from NZ$11.8m in one year. However, it does have NZ$67.1m in cash offsetting this, leading to net cash of NZ$49.0m.

How Healthy Is Vista Group International's Balance Sheet?

According to the last reported balance sheet, Vista Group International had liabilities of NZ$42.8m due within 12 months, and liabilities of NZ$46.1m due beyond 12 months. Offsetting this, it had NZ$67.1m in cash and NZ$36.1m in receivables that were due within 12 months. So it actually has NZ$14.3m 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. Simply put, the fact that Vista Group International has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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$88m, which is a fall of 39%. That makes us nervous, to say the least.

So How Risky Is Vista Group International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Vista Group International had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NZ$11m and booked a NZ$51m accounting loss. Given it only has net cash of NZ$49.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Vista Group International that you should be aware of.

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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