Does Viva Goods (HKG:933) 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.' 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. As with many other companies Viva Goods Company Limited (HKG:933) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Viva Goods

How Much Debt Does Viva Goods Carry?

As you can see below, at the end of June 2023, Viva Goods had HK$803.5m of debt, up from HK$17.1m a year ago. Click the image for more detail. However, it does have HK$1.48b in cash offsetting this, leading to net cash of HK$679.5m.

How Healthy Is Viva Goods' Balance Sheet?

We can see from the most recent balance sheet that Viva Goods had liabilities of HK$3.69b falling due within a year, and liabilities of HK$2.42b due beyond that. On the other hand, it had cash of HK$1.48b and HK$820.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$3.80b.

Viva Goods has a market capitalization of HK$8.65b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Viva Goods also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Viva Goods'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 Viva Goods wasn't profitable at an EBIT level, but managed to grow its revenue by 704%, to HK$12b. That's virtually the hole-in-one of revenue growth!

So How Risky Is Viva Goods?

Although Viva Goods had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$1.0b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Viva Goods shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is 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. For instance, we've identified 2 warning signs for Viva Goods (1 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.