Is VPower Group International Holdings (HKG:1608) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, VPower Group International Holdings Limited (HKG:1608) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, 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 VPower Group International Holdings

How Much Debt Does VPower Group International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that VPower Group International Holdings had HK$2.89b of debt in June 2023, down from HK$3.21b, one year before. However, it also had HK$111.9m in cash, and so its net debt is HK$2.78b.

How Strong Is VPower Group International Holdings' Balance Sheet?

According to the last reported balance sheet, VPower Group International Holdings had liabilities of HK$5.36b due within 12 months, and liabilities of HK$96.5m due beyond 12 months. On the other hand, it had cash of HK$111.9m and HK$2.74b worth of receivables due within a year. So it has liabilities totalling HK$2.61b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's HK$1.75b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since VPower Group International Holdings 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.

Over 12 months, VPower Group International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$2.6b, which is a fall of 47%. That makes us nervous, to say the least.

Caveat Emptor

Not only did VPower Group International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$189m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$705m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for VPower Group International Holdings you should know about.

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.