David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies VPower Group International Holdings Limited (HKG:1608) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for VPower Group International Holdings
How Much Debt Does VPower Group International Holdings Carry?
The image below, which you can click on for greater detail, shows that VPower Group International Holdings had debt of HK$2.37b at the end of June 2024, a reduction from HK$2.89b over a year. However, it does have HK$253.2m in cash offsetting this, leading to net debt of about HK$2.12b.
A Look At VPower Group International Holdings' Liabilities
The latest balance sheet data shows that VPower Group International Holdings had liabilities of HK$4.20b due within a year, and liabilities of HK$96.5m falling due after that. On the other hand, it had cash of HK$253.2m and HK$1.68b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.36b.
The deficiency here weighs heavily on the HK$1.56b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, VPower Group International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is VPower Group 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.
Over 12 months, VPower Group International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.3b, which is a fall of 49%. That makes us nervous, to say the least.
Caveat Emptor
While VPower Group International Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$1.5b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$2.7b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that VPower Group International Holdings is showing 1 warning sign in our investment analysis , 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.