Is Vobile Group (HKG:3738) 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.' 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 can see that Vobile Group Limited (HKG:3738) does use debt in its business. But the real question is whether this debt is making the company risky.

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vobile Group

How Much Debt Does Vobile Group Carry?

The image below, which you can click on for greater detail, shows that Vobile Group had debt of HK$88.3m at the end of June 2021, a reduction from HK$381.7m over a year. But on the other hand it also has HK$685.7m in cash, leading to a HK$597.4m net cash position.

A Look At Vobile Group's Liabilities

According to the last reported balance sheet, Vobile Group had liabilities of HK$104.8m due within 12 months, and liabilities of HK$121.4m due beyond 12 months. Offsetting this, it had HK$685.7m in cash and HK$166.1m in receivables that were due within 12 months. So it actually has HK$625.8m more liquid assets than total liabilities.

This surplus suggests that Vobile Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vobile Group has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Vobile Group improved its EBIT from a last year's loss to a positive HK$11m. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vobile Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Vobile Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Vobile Group has HK$597.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in HK$17m. So we are not troubled with Vobile Group's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with Vobile Group .

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.
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