Is Vivotek (TWSE:3454) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. (TWSE:3454) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Vivotek

How Much Debt Does Vivotek Carry?

You can click the graphic below for the historical numbers, but it shows that Vivotek had NT$416.6m of debt in September 2024, down from NT$515.4m, one year before. But on the other hand it also has NT$1.53b in cash, leading to a NT$1.12b net cash position.

How Healthy Is Vivotek's Balance Sheet?

The latest balance sheet data shows that Vivotek had liabilities of NT$2.46b due within a year, and liabilities of NT$177.7m falling due after that. Offsetting these obligations, it had cash of NT$1.53b as well as receivables valued at NT$1.40b due within 12 months. So it actually has NT$299.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Vivotek could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vivotek boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Vivotek if management cannot prevent a repeat of the 70% cut to EBIT 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vivotek has NT$1.12b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$98m, being 126% of its EBIT. So we are not troubled with Vivotek's debt use. 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 learn about the 3 warning signs we've spotted with Vivotek (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.