Warren Buffett famously said, '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 Virco Mfg. Corporation (NASDAQ:VIRC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Virco Mfg's Debt?

The image below, which you can click on for greater detail, shows that Virco Mfg had debt of US$4.26m at the end of July 2024, a reduction from US$46.5m over a year. However, its balance sheet shows it holds US$7.77m in cash, so it actually has US$3.51m net cash.

A Look At Virco Mfg's Liabilities

According to the last reported balance sheet, Virco Mfg had liabilities of US$55.5m due within 12 months, and liabilities of US$53.0m due beyond 12 months. Offsetting these obligations, it had cash of US$7.77m as well as receivables valued at US$56.1m due within 12 months. So it has liabilities totalling US$44.7m more than its cash and near-term receivables, combined.

Given Virco Mfg has a market capitalization of US$265.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Virco Mfg boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Virco Mfg has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Virco Mfg can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Virco Mfg has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Virco Mfg recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Virco Mfg does have more liabilities than liquid assets, it also has net cash of US$3.51m. And we liked the look of last year's 53% year-on-year EBIT growth. So we don't think Virco Mfg's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Virco Mfg, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.