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. We note that Vection Technologies Limited (ASX:VR1) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vection Technologies

What Is Vection Technologies's Debt?

The chart below, which you can click on for greater detail, shows that Vection Technologies had AU$10.1m in debt in December 2024; about the same as the year before. However, it also had AU$3.11m in cash, and so its net debt is AU$6.98m.

How Healthy Is Vection Technologies' Balance Sheet?

The latest balance sheet data shows that Vection Technologies had liabilities of AU$22.0m due within a year, and liabilities of AU$9.29m falling due after that. On the other hand, it had cash of AU$3.11m and AU$10.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$17.6m.

While this might seem like a lot, it is not so bad since Vection Technologies has a market capitalization of AU$41.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vection Technologies 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.

In the last year Vection Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to AU$35m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Vection Technologies's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost AU$3.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$4.5m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Vection Technologies (at least 4 which are concerning) , and understanding them should be part of your investment process.

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.

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