Is VibroPower (SGX:BJD) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 VibroPower Corporation Limited (SGX:BJD) 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for VibroPower

How Much Debt Does VibroPower Carry?

As you can see below, VibroPower had S$8.17m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had S$1.54m in cash, and so its net debt is S$6.63m.

How Healthy Is VibroPower's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VibroPower had liabilities of S$9.25m due within 12 months and liabilities of S$4.53m due beyond that. Offsetting this, it had S$1.54m in cash and S$9.80m in receivables that were due within 12 months. So it has liabilities totalling S$2.44m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since VibroPower has a market capitalization of S$7.59m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is VibroPower'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, VibroPower made a loss at the EBIT level, and saw its revenue drop to S$6.0m, which is a fall of 61%. To be frank that doesn't bode well.

Caveat Emptor

While VibroPower's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable S$3.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$489k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with VibroPower (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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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