Does the VDM group (ASX: VMG) use too much debt?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that VDM Group Limited (ASX: VMG) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest analysis for the VDM group

What is the net debt of the VDM group?

As you can see below, the VDM Group was in debt of A $ 10.2 million in June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he also had A $ 1.63 million in cash, so his net debt is A $ 8.55 million.

How healthy is the VDM group’s balance sheet?

According to balance sheet data, the VDM Group had A $ 15.8 million liability due within 12 months, but no longer term liabilities. In return, he had A $ 1.63 million in cash and A $ 25.0,000 in receivables due within 12 months. It therefore has liabilities totaling AU $ 14.2 million more than its cash and short-term receivables combined.

When you consider that this shortfall exceeds the company’s A $ 10.4 million market cap, you may well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay debts by raising capital at the current share price. There is no doubt that we learn the most about debt from the balance sheet. But it is the results of VDM Group that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

Over 12 months, the VDM Group reported sales of AU $ 551,000, a gain of 183%, although it did not report any profit before interest and taxes. So there is no doubt that shareholders encourage growth

Emptor Warning

It is important to note that the VDM group has recorded a loss of profit before interest and taxes (EBIT) during the last year. Indeed, he lost AU $ 439,000 in EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. It would have to improve its operation quickly for us to take an interest in it. Notably because he spent AU $ 984,000 on negative free cash flow in the past year. That means it’s on the risky side of things. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To this end, you need to know the 3 warning signs we spotted with VDM Group.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.