Is Vincent Medical Holdings (HKG:1612) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies Vincent Medical Holdings Limited (HKG:1612) makes use of debt. But is this debt a concern to shareholders?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Vincent Medical Holdings

How Much Debt Does Vincent Medical Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Vincent Medical Holdings had HK$38.5m of debt in December 2022, down from HK$55.3m, one year before. But it also has HK$159.3m in cash to offset that, meaning it has HK$120.8m net cash.

A Look At Vincent Medical Holdings' Liabilities

We can see from the most recent balance sheet that Vincent Medical Holdings had liabilities of HK$216.6m falling due within a year, and liabilities of HK$11.5m due beyond that. Offsetting these obligations, it had cash of HK$159.3m as well as receivables valued at HK$188.6m due within 12 months. So it can boast HK$119.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Vincent Medical Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Vincent Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Vincent Medical Holdings made a loss at the EBIT level, and saw its revenue drop to HK$629m, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Vincent Medical Holdings?

Although Vincent Medical Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$57m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Vincent Medical 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.

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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.