We Think Vivotek (TPE:3454) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Vivotek Inc. (TPE:3454) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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 Vivotek

What Is Vivotek's Debt?

As you can see below, Vivotek had NT$369.2m of debt at September 2020, down from NT$391.6m a year prior. However, its balance sheet shows it holds NT$1.06b in cash, so it actually has NT$694.6m net cash.

A Look At Vivotek's Liabilities

According to the last reported balance sheet, Vivotek had liabilities of NT$1.22b due within 12 months, and liabilities of NT$373.6m due beyond 12 months. On the other hand, it had cash of NT$1.06b and NT$710.9m worth of receivables due within a year. So it actually has NT$181.7m 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. Succinctly put, Vivotek boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Vivotek's load is not too heavy, because its EBIT was down 24% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Vivotek will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vivotek has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 it is always sensible to investigate a company's debt, in this case Vivotek has NT$694.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$133m, being 117% of its EBIT. So we don't have any problem with Vivotek's use of debt. 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. For example, we've discovered 2 warning signs for Vivotek (1 is significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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