Here's Why Vocera Communications (NYSE:VCRA) Can Manage Its Debt Responsibly
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Vocera Communications, Inc. (NYSE:VCRA) does use debt in its business. But should shareholders be worried about its use of debt?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Vocera Communications
How Much Debt Does Vocera Communications Carry?
As you can see below, at the end of March 2021, Vocera Communications had US$234.1m of debt, up from US$118.9m a year ago. Click the image for more detail. But on the other hand it also has US$315.1m in cash, leading to a US$81.0m net cash position.
How Healthy Is Vocera Communications' Balance Sheet?
We can see from the most recent balance sheet that Vocera Communications had liabilities of US$76.7m falling due within a year, and liabilities of US$254.2m due beyond that. Offsetting this, it had US$315.1m in cash and US$38.3m in receivables that were due within 12 months. So it can boast US$22.5m more liquid assets than total liabilities.
Having regard to Vocera Communications' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.18b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Vocera Communications has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, Vocera Communications made a loss at the EBIT level, last year, but improved that to positive EBIT of US$711k in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vocera Communications's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vocera Communications 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. Happily for any shareholders, Vocera Communications actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Vocera Communications has net cash of US$81.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 3,974% of that EBIT to free cash flow, bringing in US$28m. So we are not troubled with Vocera Communications's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Vocera Communications that you should be aware of before investing here.
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.
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. 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.
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