Health Check: How Prudently Does V.S. International Group (HKG:1002) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, V.S. International Group Limited (HKG:1002) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See 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¥35.1m at the end of July 2023, a reduction from CN¥37.4m over a year. However, its balance sheet shows it holds CN¥85.5m in cash, so it actually has CN¥50.3m net cash.

How Strong Is V.S. International Group's Balance Sheet?

The latest balance sheet data shows that V.S. International Group had liabilities of CN¥51.5m due within a year, and liabilities of CN¥920.0k falling due after that. Offsetting these obligations, it had cash of CN¥85.5m as well as receivables valued at CN¥27.2m due within 12 months. So it can boast CN¥60.2m more liquid assets than total liabilities.

This luscious liquidity implies that V.S. International Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, V.S. International Group 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 V.S. International Group'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.

In the last year V.S. International Group had a loss before interest and tax, and actually shrunk its revenue by 37%, to CN¥76m. To be frank that doesn't bode well.

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¥28m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for V.S. International Group you should know about.

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.