Is Vincent Medical Holdings (HKG:1612) A Risky Investment?

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.' 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, Vincent Medical Holdings Limited (HKG:1612) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Vincent Medical Holdings

How Much Debt Does Vincent Medical Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Vincent Medical Holdings had debt of HK$69.1m, up from HK$30.6m in one year. However, it does have HK$169.1m in cash offsetting this, leading to net cash of HK$100.0m.

A Look At Vincent Medical Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Vincent Medical Holdings had liabilities of HK$330.9m due within 12 months and liabilities of HK$10.7m due beyond that. On the other hand, it had cash of HK$169.1m and HK$209.9m worth of receivables due within a year. So it actually has HK$37.3m more liquid assets than total liabilities.

This surplus suggests that Vincent Medical Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vincent Medical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Vincent Medical Holdings grew its EBIT by 815% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vincent Medical Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vincent Medical Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Vincent Medical Holdings's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Vincent Medical Holdings has net cash of HK$100.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 815% year-on-year EBIT growth. So we don't think Vincent Medical Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4 warning signs for Vincent Medical Holdings (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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