Is Vico International Holdings (HKG:1621) Using Too Much Debt?

March 07, 2022
  •  Updated
July 01, 2022
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Vico International Holdings Limited (HKG:1621) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vico International Holdings

What Is Vico International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Vico International Holdings had debt of HK$33.4m at the end of September 2021, a reduction from HK$37.4m over a year. But on the other hand it also has HK$42.1m in cash, leading to a HK$8.72m net cash position.

SEHK:1621 Debt to Equity History March 7th 2022

How Strong Is Vico International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Vico International Holdings had liabilities of HK$46.6m falling due within a year, and liabilities of HK$4.82m due beyond that. Offsetting this, it had HK$42.1m in cash and HK$55.9m in receivables that were due within 12 months. So it actually has HK$46.5m more liquid assets than total liabilities.

This surplus strongly suggests that Vico International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Vico International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Vico International Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Vico 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Vico International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Vico International Holdings recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Vico International Holdings has net cash of HK$8.72m, as well as more liquid assets than liabilities. So is Vico International Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Vico International Holdings you should know about.

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.

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

Find out whether Vico International Holdings 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.

View the Free Analysis