Is Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) Using Too Much Debt?

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 is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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. The first step when considering a company's debt levels is to consider its 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?

As you can see below, Vietnam Manufacturing and Export Processing (Holdings) had US$40.4m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$52.4m in cash offsetting this, leading to net cash of US$12.0m.

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

We can see from the most recent balance sheet that Vietnam Manufacturing and Export Processing (Holdings) had liabilities of US$67.9m falling due within a year, and liabilities of US$2.34m due beyond that. On the other hand, it had cash of US$52.4m and US$36.9m worth of receivables due within a year. So it can boast US$19.0m 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. Given it has easily adequate short term liquidity, we don't think it will have any issues 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.

Although Vietnam Manufacturing and Export Processing (Holdings) made a loss at the EBIT level, last year, it was also good to see that it generated US$2.4m in EBIT over the last twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vietnam Manufacturing and Export Processing (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Vietnam Manufacturing and Export Processing (Holdings) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vietnam Manufacturing and Export Processing (Holdings) has US$12.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Vietnam Manufacturing and Export Processing (Holdings)'s use of debt. 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. Case in point: We've spotted 2 warning signs for Vietnam Manufacturing and Export Processing (Holdings) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.