Here's Why Vigor Kobo (GTSM:2733) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Vigor Kobo Co., LTD. (GTSM:2733) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vigor Kobo

What Is Vigor Kobo's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Vigor Kobo had debt of NT$140.0m, up from NT$40.0m in one year. However, it also had NT$130.8m in cash, and so its net debt is NT$9.20m.

How Healthy Is Vigor Kobo's Balance Sheet?

According to the last reported balance sheet, Vigor Kobo had liabilities of NT$201.7m due within 12 months, and liabilities of NT$22.3m due beyond 12 months. On the other hand, it had cash of NT$130.8m and NT$8.72m worth of receivables due within a year. So it has liabilities totalling NT$84.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Vigor Kobo is worth NT$238.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vigor Kobo will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Vigor Kobo had a loss before interest and tax, and actually shrunk its revenue by 40%, to NT$460m. To be frank that doesn't bode well.

Caveat Emptor

While Vigor Kobo's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping NT$91m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$61m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Vigor Kobo (of which 2 are a bit unpleasant!) you should know about.

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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