Is Vista Group International (NZSE:VGL) Using Debt Sensibly?

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. We can see that Vista Group International Limited (NZSE:VGL) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Vista Group International

What Is Vista Group International's Debt?

The chart below, which you can click on for greater detail, shows that Vista Group International had NZ$18.9m in debt in June 2023; about the same as the year before. However, it does have NZ$37.1m in cash offsetting this, leading to net cash of NZ$18.2m.

A Look At Vista Group International's Liabilities

Zooming in on the latest balance sheet data, we can see that Vista Group International had liabilities of NZ$51.4m due within 12 months and liabilities of NZ$30.9m due beyond that. On the other hand, it had cash of NZ$37.1m and NZ$33.8m worth of receivables due within a year. So it has liabilities totalling NZ$11.4m more than its cash and near-term receivables, combined.

Since publicly traded Vista Group International shares are worth a total of NZ$342.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Vista Group International also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Vista Group International wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to NZ$142m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Vista Group International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Vista Group International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NZ$8.4m and booked a NZ$12m accounting loss. With only NZ$18.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Vista Group International's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should be aware of the 1 warning sign we've spotted with Vista Group International .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.