Is Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

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

What Is Vietnam Manufacturing and Export Processing (Holdings)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Vietnam Manufacturing and Export Processing (Holdings) had US$37.7m of debt, an increase on US$31.4m, over one year. But on the other hand it also has US$51.5m in cash, leading to a US$13.7m net cash position.

A Look At Vietnam Manufacturing and Export Processing (Holdings)'s Liabilities

The latest balance sheet data shows that Vietnam Manufacturing and Export Processing (Holdings) had liabilities of US$61.5m due within a year, and liabilities of US$704.7k falling due after that. On the other hand, it had cash of US$51.5m and US$31.6m worth of receivables due within a year. So it can boast US$20.8m more liquid assets than total liabilities.

This surplus strongly suggests that Vietnam Manufacturing and Export Processing (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Vietnam Manufacturing and Export Processing (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Vietnam Manufacturing and Export Processing (Holdings) 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.

Over 12 months, Vietnam Manufacturing and Export Processing (Holdings) made a loss at the EBIT level, and saw its revenue drop to US$92m, which is a fall of 5.7%. We would much prefer see growth.

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

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Vietnam Manufacturing and Export Processing (Holdings) had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$1.0m and booked a US$4.2m accounting loss. But at least it has US$13.7m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Vietnam Manufacturing and Export Processing (Holdings) , and understanding them should be part of your investment process.

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.