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Is Vection Technologies (ASX:VR1) Using Debt Sensibly?

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  VR1.AX

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Simply Wall St

13 October 2021·4-min read

In this article:

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• VR1.AX

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see thatVection Technologies Limited(ASX:VR1) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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Check out our latest analysis for Vection Technologies

What Is Vection Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Vection Technologies had AU$4.22m of debt, an increase on AU$849.8k, over one year. But on the other hand it also has AU$7.08m in cash, leading to a AU$2.86m net cash position.

debt-equity-history-analysis

How Strong Is Vection Technologies' Balance Sheet?

The latest balance sheet data shows that Vection Technologies had liabilities of AU$14.8m due within a year, and liabilities of AU$6.51m falling due after that. Offsetting these obligations, it had cash of AU$7.08m as well as receivables valued at AU$4.85m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.35m.

Of course, Vection Technologies has a market capitalization of AU$76.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Vection Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vection Technologies 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.

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