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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that V.S. International Group Limited (HKG:1002) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for V.S. International Group
What Is V.S. International Group's Net Debt?
As you can see below, V.S. International Group had CN¥29.7m of debt at January 2024, down from CN¥37.5m a year prior. However, it does have CN¥77.8m in cash offsetting this, leading to net cash of CN¥48.0m.
How Healthy Is V.S. International Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that V.S. International Group had liabilities of CN¥36.6m due within 12 months and liabilities of CN¥781.0k due beyond that. On the other hand, it had cash of CN¥77.8m and CN¥15.9m worth of receivables due within a year. So it can boast CN¥56.3m more liquid assets than total liabilities.
This luscious liquidity implies that V.S. International Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that V.S. International Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since V.S. International Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year V.S. International Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to CN¥77m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is V.S. International Group?
While V.S. International Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥7.0m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for V.S. International Group you should know about.
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.
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