We Think Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) Can Stay On Top Of Its 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. We note that Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 March 2023 Vietnam Manufacturing and Export Processing (Holdings) had debt of US$40.1m, up from US$37.7m in one year. However, its balance sheet shows it holds US$50.6m in cash, so it actually has US$10.5m net cash.

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$69.4m due within a year, and liabilities of US$2.37m falling due after that. On the other hand, it had cash of US$50.6m and US$37.8m worth of receivables due within a year. So it actually has US$16.6m more liquid assets than total liabilities.

It's good to see that Vietnam Manufacturing and Export Processing (Holdings) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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$1.4m 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept 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$10.5m in net cash and a decent-looking balance sheet. So we are not troubled with Vietnam Manufacturing and Export Processing (Holdings)'s debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Vietnam Manufacturing and Export Processing (Holdings) that you should be aware of before investing here.

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.