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. As with many other companies Vistra Corp. (NYSE:VST) makes use of debt. But should shareholders be worried about its use of debt?
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 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Vistra's Debt?
As you can see below, at the end of December 2021, Vistra had US$10.9b of debt, up from US$10.0b a year ago. Click the image for more detail. On the flip side, it has US$1.34b in cash leading to net debt of about US$9.61b.
How Healthy Is Vistra's Balance Sheet?
The latest balance sheet data shows that Vistra had liabilities of US$5.84b due within a year, and liabilities of US$15.5b falling due after that. On the other hand, it had cash of US$1.34b and US$1.96b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$18.1b.
This deficit casts a shadow over the US$10.8b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Vistra would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vistra can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Vistra wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to US$12b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Vistra had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$1.5b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$1.8b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Vistra (of which 1 is potentially serious!) you should know about.
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.
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.