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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Vista Group International Limited (NZSE:VGL) does use debt in its business. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Vista Group International
What Is Vista Group International's Net Debt?
The image below, which you can click on for greater detail, shows that Vista Group International had debt of NZ$16.8m at the end of December 2021, a reduction from NZ$18.1m over a year. But it also has NZ$60.4m in cash to offset that, meaning it has NZ$43.6m net cash.
How Healthy Is Vista Group International's Balance Sheet?
We can see from the most recent balance sheet that Vista Group International had liabilities of NZ$47.6m falling due within a year, and liabilities of NZ$35.7m due beyond that. Offsetting this, it had NZ$60.4m in cash and NZ$35.5m in receivables that were due within 12 months. So it actually has NZ$12.6m more liquid assets than total liabilities.
This surplus suggests that Vista Group International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vista Group International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vista Group International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.