G-Vision International (Holdings) (HKG:657) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, G-Vision International (Holdings) Limited (HKG:657) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for G-Vision International (Holdings)

What Is G-Vision International (Holdings)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 G-Vision International (Holdings) had HK$43.9m of debt, an increase on none, over one year. On the flip side, it has HK$12.9m in cash leading to net debt of about HK$31.0m.

A Look At G-Vision International (Holdings)'s Liabilities

The latest balance sheet data shows that G-Vision International (Holdings) had liabilities of HK$56.3m due within a year, and liabilities of HK$11.5m falling due after that. Offsetting this, it had HK$12.9m in cash and HK$4.38m in receivables that were due within 12 months. So its liabilities total HK$50.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because G-Vision International (Holdings) is worth HK$136.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since G-Vision International (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year G-Vision International (Holdings)'s revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, G-Vision International (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$68m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for G-Vision International (Holdings) (2 are potentially serious!) that you should be aware of before investing here.

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.