Yahoo Finance Vmoto (ASX:VMT) Has Debt But No Earnings; Should You Worry?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Vmoto Limited (ASX:VMT) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Vmoto
What Is Vmoto's Net Debt?
The chart below, which you can click on for greater detail, shows that Vmoto had AU$1.04m in debt in June 2019; about the same as the year before. However, its balance sheet shows it holds AU$5.15m in cash, so it actually has AU$4.11m net cash.
How Strong Is Vmoto's Balance Sheet?
According to the balance sheet data, Vmoto had liabilities of AU$9.04m due within 12 months, but no longer term liabilities. On the other hand, it had cash of AU$5.15m and AU$2.87m worth of receivables due within a year. So it has liabilities totalling AU$1.02m more than its cash and near-term receivables, combined.
Since publicly traded Vmoto shares are worth a total of AU$22.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Vmoto boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vmoto's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Vmoto reported revenue of AU$28m, which is a gain of 75%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Vmoto?
Although Vmoto had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of AU$212k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for Vmoto shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Vmoto insider transactions.
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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
