Is Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) A Risky Investment?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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.
See our latest analysis for Vietnam Manufacturing and Export Processing (Holdings)
What Is Vietnam Manufacturing and Export Processing (Holdings)'s Net Debt?
The image below, which you can click on for greater detail, shows that at September 2022 Vietnam Manufacturing and Export Processing (Holdings) had debt of US$40.0m, up from US$36.0m in one year. But on the other hand it also has US$56.2m in cash, leading to a US$16.2m net cash position.
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$67.7m due within a year, and liabilities of US$2.32m falling due after that. Offsetting this, it had US$56.2m in cash and US$29.7m in receivables that were due within 12 months. So it can boast US$15.9m 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! There's no doubt that we learn most about debt from the balance sheet. But it is Vietnam Manufacturing and Export Processing (Holdings)'s earnings that will influence how the balance sheet holds up in the future. 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) reported revenue of US$120m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Vietnam Manufacturing and Export Processing (Holdings)?
While Vietnam Manufacturing and Export Processing (Holdings) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$2.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 24% is a good sign. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Vietnam Manufacturing and Export Processing (Holdings) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
About SEHK:422
Vietnam Manufacturing and Export Processing (Holdings)
An investment holding company, manufactures and sells motorbikes and scooters, and related spare parts and engines in Vietnam.
Excellent balance sheet and fair value.