Does Veeko International Holdings (HKG:1173) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. Importantly, Veeko International Holdings Limited (HKG:1173) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Veeko International Holdings

What Is Veeko International Holdings's Net Debt?

As you can see below, Veeko International Holdings had HK$426.2m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$45.0m in cash offsetting this, leading to net debt of about HK$381.2m.

How Strong Is Veeko International Holdings' Balance Sheet?

According to the last reported balance sheet, Veeko International Holdings had liabilities of HK$624.7m due within 12 months, and liabilities of HK$88.4m due beyond 12 months. Offsetting these obligations, it had cash of HK$45.0m as well as receivables valued at HK$39.8m due within 12 months. So it has liabilities totalling HK$628.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$138.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Veeko International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Veeko International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Veeko International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$670m, which is a fall of 53%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Veeko International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$171m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$238m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 2 warning signs for Veeko International Holdings (1 is a bit unpleasant) you should be aware of.

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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