Does Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Vietnam Manufacturing and Export Processing (Holdings)

How Much Debt Does Vietnam Manufacturing and Export Processing (Holdings) Carry?

The image below, which you can click on for greater detail, shows that Vietnam Manufacturing and Export Processing (Holdings) had debt of US$34.1m at the end of March 2024, a reduction from US$40.1m over a year. However, it does have US$47.6m in cash offsetting this, leading to net cash of US$13.6m.

How Healthy Is Vietnam Manufacturing and Export Processing (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Vietnam Manufacturing and Export Processing (Holdings) had liabilities of US$45.8m due within a year, and liabilities of US$2.16m falling due after that. Offsetting these obligations, it had cash of US$47.6m as well as receivables valued at US$18.2m due within 12 months. So it can boast US$17.9m more liquid assets than total liabilities.

This surplus suggests that Vietnam Manufacturing and Export Processing (Holdings) is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Vietnam Manufacturing and Export Processing (Holdings) 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 it is Vietnam Manufacturing and Export Processing (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, Vietnam Manufacturing and Export Processing (Holdings) made a loss at the EBIT level, and saw its revenue drop to US$88m, which is a fall of 34%. That makes us nervous, to say the least.

So How Risky Is Vietnam Manufacturing and Export Processing (Holdings)?

Although Vietnam Manufacturing and Export Processing (Holdings) had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$3.9m. 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. For instance, we've identified 1 warning sign for Vietnam Manufacturing and Export Processing (Holdings) that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com