Health Check: How Prudently Does Vobile Group (HKG:3738) Use 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. Importantly, Vobile Group Limited (HKG:3738) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Vobile Group

What Is Vobile Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Vobile Group had US$30.7m of debt in December 2020, down from US$50.0m, one year before. But it also has US$33.8m in cash to offset that, meaning it has US$3.14m net cash.

How Healthy Is Vobile Group's Balance Sheet?

The latest balance sheet data shows that Vobile Group had liabilities of US$12.6m due within a year, and liabilities of US$34.4m falling due after that. Offsetting this, it had US$33.8m in cash and US$9.14m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.06m.

Having regard to Vobile Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.46b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Vobile Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vobile Group'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, Vobile Group reported revenue of US$44m, which is a gain of 133%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Vobile Group?

Although Vobile Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$10m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Vobile Group shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat 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. Be aware that Vobile Group is showing 4 warning signs in our investment analysis , 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.

If you’re looking to trade Vobile Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.