Health Check: How Prudently Does G-Vision International (Holdings) (HKG:657) Use 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 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 G-Vision International (Holdings) Limited (HKG:657) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 G-Vision International (Holdings)

How Much Debt Does G-Vision International (Holdings) Carry?

As you can see below, at the end of March 2021, G-Vision International (Holdings) had HK$20.1m of debt, up from none a year ago. Click the image for more detail. But it also has HK$22.7m in cash to offset that, meaning it has HK$2.61m net cash.

How Strong Is G-Vision International (Holdings)'s Balance Sheet?

According to the balance sheet data, G-Vision International (Holdings) had liabilities of HK$33.1m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of HK$22.7m as well as receivables valued at HK$3.29m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$7.12m.

Given G-Vision International (Holdings) has a market capitalization of HK$130.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, G-Vision International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is G-Vision International (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, G-Vision International (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$37m, which is a fall of 45%. To be frank that doesn't bode well.

So How Risky Is G-Vision International (Holdings)?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months G-Vision International (Holdings) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$48m of cash and made a loss of HK$8.8m. While this does make the company a bit risky, it's important to remember it has net cash of HK$2.61m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive 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. Case in point: We've spotted 5 warning signs for G-Vision International (Holdings) you should be aware of, and 2 of them are concerning.

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.
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