We Think Vedan International (Holdings) (HKG:2317) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Vedan International (Holdings) Limited (HKG:2317) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vedan International (Holdings)

What Is Vedan International (Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Vedan International (Holdings) had US$46.4m of debt, an increase on US$40.1m, over one year. But it also has US$71.5m in cash to offset that, meaning it has US$25.1m net cash.

How Healthy Is Vedan International (Holdings)'s Balance Sheet?

We can see from the most recent balance sheet that Vedan International (Holdings) had liabilities of US$64.9m falling due within a year, and liabilities of US$20.4m due beyond that. Offsetting these obligations, it had cash of US$71.5m as well as receivables valued at US$31.2m due within 12 months. So it can boast US$17.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Vedan International (Holdings) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vedan International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Vedan International (Holdings) grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vedan 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Vedan 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. Looking at the most recent three years, Vedan International (Holdings) recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Vedan International (Holdings) has US$25.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Vedan International (Holdings)'s use of debt is risky. 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. For example, we've discovered 2 warning signs for Vedan International (Holdings) (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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