We Think Vision Values Holdings (HKG:862) Has A Fair Chunk 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. As with many other companies Vision Values Holdings Limited (HKG:862) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Vision Values Holdings

How Much Debt Does Vision Values Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Vision Values Holdings had HK$68.0m of debt, an increase on HK$46.7m, over one year. However, it also had HK$30.8m in cash, and so its net debt is HK$37.2m.

A Look At Vision Values Holdings' Liabilities

We can see from the most recent balance sheet that Vision Values Holdings had liabilities of HK$128.4m falling due within a year, and liabilities of HK$33.4m due beyond that. Offsetting these obligations, it had cash of HK$30.8m as well as receivables valued at HK$7.46m due within 12 months. So it has liabilities totalling HK$123.5m more than its cash and near-term receivables, combined.

Of course, Vision Values Holdings has a market capitalization of HK$765.2m, 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.

In the last year Vision Values Holdings had a loss before interest and tax, and actually shrunk its revenue by 32%, to HK$44m. To be frank that doesn't bode well.

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). To be specific the EBIT loss came in at HK$44m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$52m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Vision Values Holdings (2 are a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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