Stock Analysis

Health Check: How Prudently Does Viva Goods (HKG:933) Use Debt?

SEHK:933
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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. Importantly, Viva Goods Company Limited (HKG:933) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Viva Goods

What Is Viva Goods's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Viva Goods had debt of HK$803.5m, up from HK$17.1m in one year. However, it does have HK$1.48b in cash offsetting this, leading to net cash of HK$679.5m.

debt-equity-history-analysis
SEHK:933 Debt to Equity History August 20th 2023

How Strong Is Viva Goods' Balance Sheet?

According to the last reported balance sheet, Viva Goods had liabilities of HK$3.69b due within 12 months, and liabilities of HK$2.42b due beyond 12 months. 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.

This deficit isn't so bad because Viva Goods is worth HK$12.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 you can't view debt in total isolation; since Viva Goods 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, Viva Goods reported revenue of HK$12b, which is a gain of 704%, although it did not report any earnings before interest and tax. 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 we still think it's somewhat 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 example Viva Goods has 2 warning signs (and 1 which can't be ignored) we think 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.

Valuation is complex, but we're helping make it simple.

Find out whether Viva Goods is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.