Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Victory Offices Limited (ASX:VOL) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Victory Offices
How Much Debt Does Victory Offices Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Victory Offices had debt of AU$3.30m, up from AU$2.57m in one year. However, its balance sheet shows it holds AU$15.1m in cash, so it actually has AU$11.8m net cash.
A Look At Victory Offices' Liabilities
The latest balance sheet data shows that Victory Offices had liabilities of AU$32.1m due within a year, and liabilities of AU$176.0m falling due after that. Offsetting this, it had AU$15.1m in cash and AU$3.51m in receivables that were due within 12 months. So its liabilities total AU$189.4m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the AU$22.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Victory Offices would likely require a major re-capitalisation if it had to pay its creditors today. Given that Victory Offices has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 Victory Offices 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.