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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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies. Veeko International Holdings Limited (HKG:1173) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Veeko International Holdings Carry?
The chart below, which you can click on for greater detail, shows that Veeko International Holdings had HK$266.2m in debt in March 2019; about the same as the year before. However, it also had HK$56.1m in cash, and so its net debt is HK$210.1m.
How Strong Is Veeko International Holdings’s Balance Sheet?
We can see from the most recent balance sheet that Veeko International Holdings had liabilities of HK$371.5m falling due within a year, and liabilities of HK$21.5m due beyond that. On the other hand, it had cash of HK$56.1m and HK$49.5m worth of receivables due within a year. So its liabilities total HK$287.4m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company’s HK$284.5m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner’s social media. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Since Veeko International Holdings does have net debt, we think it is worthwhile for shareholders to keep an eye on the balance sheet, over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Veeko International Holdings will need earnings to service that debt. 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.
In the last year Veeko International Holdings actually shrunk its revenue by 12%, to HK$1.7b. That’s not what we would hope to see.
While Veeko 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$63m. Considering that alongside the liabilities mentioned above make us nervous about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$26m over the last twelve months. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Veeko International Holdings’s profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.