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. Importantly, Vico International Holdings Limited (HKG:1621) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Vico International Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Vico International Holdings had HK$31.7m of debt, an increase on HK$14.8, over one year. But it also has HK$78.3m in cash to offset that, meaning it has HK$46.6m net cash.
How Strong Is Vico International Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Vico International Holdings had liabilities of HK$51.5m due within 12 months and liabilities of HK$2.29m due beyond that. Offsetting these obligations, it had cash of HK$78.3m as well as receivables valued at HK$54.0m due within 12 months. So it actually has HK$78.6m more liquid assets than total liabilities.
This surplus liquidity suggests that Vico International Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Vico International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Vico International Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vico International Holdings's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vico International Holdings 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. Considering the last three years, Vico International Holdings actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While it is always sensible to investigate a company's debt, in this case Vico International Holdings has HK$46.6m in net cash and a decent-looking balance sheet. So we are not troubled with Vico International Holdings's debt use. Given Vico International Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
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.
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