Vision Values Holdings (HKG:862) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Vision Values Holdings Limited (HKG:862) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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.

See our latest analysis for Vision Values Holdings

What Is Vision Values Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Vision Values Holdings had debt of HK$71.0m, up from HK$38.0m in one year. However, it also had HK$16.5m in cash, and so its net debt is HK$54.5m.

How Strong Is Vision Values Holdings' Balance Sheet?

We can see from the most recent balance sheet that Vision Values Holdings had liabilities of HK$116.3m falling due within a year, and liabilities of HK$3.05m due beyond that. On the other hand, it had cash of HK$16.5m and HK$8.74m worth of receivables due within a year. So it has liabilities totalling HK$94.1m more than its cash and near-term receivables, combined.

Of course, Vision Values Holdings has a market capitalization of HK$1.12b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vision Values Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Vision Values Holdings made a loss at the EBIT level, and saw its revenue drop to HK$60m, which is a fall of 6.4%. That's not what we would hope to see.

Caveat Emptor

Importantly, Vision Values Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$66m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$60m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 2 warning signs with Vision Values Holdings , and understanding them should be part of your investment process.

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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