Is Veeko International Holdings (HKG:1173) Using Too Much Debt?

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.' 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. We can see that Veeko International Holdings Limited (HKG:1173) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Veeko International Holdings

What Is Veeko International Holdings's Net Debt?

As you can see below, Veeko International Holdings had HK$375.5m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$10.3m in cash, and so its net debt is HK$365.2m.

How Healthy Is Veeko International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Veeko International Holdings had liabilities of HK$510.6m falling due within a year, and liabilities of HK$49.4m due beyond that. Offsetting these obligations, it had cash of HK$10.3m as well as receivables valued at HK$6.19m due within 12 months. So its liabilities total HK$543.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$113.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Veeko International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Veeko International Holdings will need earnings to service that debt. 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$500m, which is a fall of 3.4%. That's not what we would hope to see.

Caveat Emptor

Importantly, Veeko International Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$70m 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. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost HK$53m 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Veeko International Holdings (of which 1 is concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.