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Is Victory Offices (ASX:VOL) Using Debt Sensibly?

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.

debt-equity-history-analysis
debt-equity-history-analysis

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.

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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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Victory Offices can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Victory Offices?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Victory Offices had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$11m and booked a AU$37m accounting loss. With only AU$11.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Victory Offices you should be aware of, and 3 of them make us uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.