Is Veeko International Holdings (HKG:1173) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Veeko International Holdings Limited (HKG:1173) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. 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.

View our latest analysis for Veeko International Holdings

What Is Veeko International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Veeko International Holdings had HK$402.8m of debt, an increase on HK$361.0m, over one year. However, because it has a cash reserve of HK$15.0m, its net debt is less, at about HK$387.8m.

How Strong Is Veeko International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Veeko International Holdings had liabilities of HK$558.4m falling due within a year, and liabilities of HK$96.2m due beyond that. Offsetting these obligations, it had cash of HK$15.0m as well as receivables valued at HK$6.16m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$633.3m.

The deficiency here weighs heavily on the HK$146.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of HK$536m, which is a gain of 18%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Veeko International Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$9.9m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of HK$94m and the profit of HK$5.3m. So there is arguably potential that the company is going to turn things around. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Veeko International Holdings that 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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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.