Does V.S. International Group (HKG:1002) Have A Healthy Balance Sheet?

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.' 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 note that V.S. International Group Limited (HKG:1002) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for V.S. International Group

What Is V.S. International Group's Net Debt?

The image below, which you can click on for greater detail, shows that V.S. International Group had debt of CN¥29.7m at the end of January 2024, a reduction from CN¥37.5m over a year. But on the other hand it also has CN¥77.8m in cash, leading to a CN¥48.0m net cash position.

A Look At V.S. International Group's Liabilities

According to the last reported balance sheet, V.S. International Group had liabilities of CN¥36.6m due within 12 months, and liabilities of CN¥781.0k due beyond 12 months. Offsetting these obligations, it had cash of CN¥77.8m as well as receivables valued at CN¥15.9m due within 12 months. So it can boast CN¥56.3m more liquid assets than total liabilities.

This surplus liquidity suggests that V.S. International Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that V.S. International Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since V.S. International Group will need earnings to service that debt. 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.

In the last year V.S. International Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to CN¥77m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is V.S. International Group?

While V.S. International Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥14m. 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'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for V.S. International Group (1 shouldn't be ignored!) that you should be aware of before investing here.

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.