Here's Why Vision Values Holdings (HKG:862) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Vision Values Holdings Limited (HKG:862) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vision Values Holdings

What Is Vision Values Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Vision Values Holdings had HK$116.7m of debt, an increase on HK$76.0m, over one year. However, because it has a cash reserve of HK$45.3m, its net debt is less, at about HK$71.4m.

A Look At Vision Values Holdings' Liabilities

We can see from the most recent balance sheet that Vision Values Holdings had liabilities of HK$147.9m falling due within a year, and liabilities of HK$52.6m due beyond that. Offsetting these obligations, it had cash of HK$45.3m as well as receivables valued at HK$8.96m due within 12 months. So it has liabilities totalling HK$146.2m more than its cash and near-term receivables, combined.

Since publicly traded Vision Values Holdings shares are worth a total of HK$820.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vision Values 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.

In the last year Vision Values Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to HK$47m. We would much prefer see growth.

Caveat Emptor

Not only did Vision Values Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$51m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$42m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Vision Values Holdings has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.