Vicon Holdings (HKG:3878) Is Carrying A Fair Bit Of 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.' 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 can see that Vicon Holdings Limited (HKG:3878) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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.

Check out our latest analysis for Vicon Holdings

What Is Vicon Holdings's Debt?

The image below, which you can click on for greater detail, shows that Vicon Holdings had debt of HK$22.8m at the end of September 2021, a reduction from HK$79.3m over a year. However, it does have HK$19.6m in cash offsetting this, leading to net debt of about HK$3.23m.

How Healthy Is Vicon Holdings' Balance Sheet?

The latest balance sheet data shows that Vicon Holdings had liabilities of HK$106.0m due within a year, and liabilities of HK$22.7m falling due after that. Offsetting this, it had HK$19.6m in cash and HK$245.8m in receivables that were due within 12 months. So it can boast HK$136.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Vicon Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. But either way, Vicon Holdings has virtually no net debt, 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 you can't view debt in total isolation; since Vicon 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, Vicon Holdings made a loss at the EBIT level, and saw its revenue drop to HK$104m, which is a fall of 79%. That makes us nervous, to say the least.

Caveat Emptor

While Vicon Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$76m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Vicon Holdings (1 doesn't sit too well with us) you should be aware of.

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.