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 “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We note that Vico International Holdings Limited (HKG: 1621) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Vico International Holdings
What is the debt of Vico International Holdings?
You can click on the graph below for historical figures, but it shows that Vico International Holdings was in debt of HK $ 33.4 million in September 2021, up from HK $ 37.4 million a year earlier. But on the other hand, he also has HK $ 42.1million in cash which leads to a net cash position of HK $ 8.72million.
How strong is Vico International Holdings’ balance sheet?
Latest balance sheet data shows Vico International Holdings had HK $ 46.6 million in debt owed within one year, and HK $ 4.82 million in debt maturing thereafter. . In return, he had HK $ 42.1 million in cash and HK $ 55.9 million in receivables due within 12 months. So he actually has HK $ 46.5million Following liquid assets as total liabilities.
This abundant liquidity means that Vico International Holdings’ balance sheet is as solid as a giant sequoia. From this point of view, lenders should feel as secure as the beloved of a black belt karate master. Put simply, the fact that Vico International Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
Vico International Holdings’ EBIT has been fairly stable over the past year, but that shouldn’t be a problem considering it doesn’t have a lot of debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the earnings of Vico International Holdings that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Vico International Holdings may have net cash on the balance sheet, but it is always interesting to consider the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Vico International Holdings has generated strong free cash flow equivalent to 52% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
While it is always a good idea to investigate a company’s debt, in this case Vico International Holdings has HK $ 8.72 million in net cash and a decent balance sheet. We therefore do not believe that the use of debt by Vico International Holdings is risky. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Vico International Holdings has 2 warning signs we think you should be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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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.