Vivotek (TPE:3454) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Vivotek Inc. (TPE:3454) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vivotek

What Is Vivotek's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Vivotek had debt of NT$590.5m, up from NT$385.0m in one year. However, it does have NT$1.43b in cash offsetting this, leading to net cash of NT$842.5m.

How Healthy Is Vivotek's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vivotek had liabilities of NT$1.47b due within 12 months and liabilities of NT$373.0m due beyond that. On the other hand, it had cash of NT$1.43b and NT$792.8m worth of receivables due within a year. So it can boast NT$378.2m more liquid assets than total liabilities.

This surplus suggests that Vivotek has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vivotek has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Vivotek has seen its EBIT plunge 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Vivotek'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vivotek may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Vivotek actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Vivotek has net cash of NT$842.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in NT$428m. So is Vivotek's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Vivotek is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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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