Here's Why Vital Innovations Holdings (HKG:6133) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Vital Innovations Holdings Limited (HKG:6133) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Vital Innovations Holdings's Debt?

As you can see below, Vital Innovations Holdings had CN¥22.7m of debt at June 2025, down from CN¥28.0m a year prior. However, because it has a cash reserve of CN¥7.83m, its net debt is less, at about CN¥14.9m.

A Look At Vital Innovations Holdings' Liabilities

According to the last reported balance sheet, Vital Innovations Holdings had liabilities of CN¥123.6m due within 12 months, and liabilities of CN¥1.06m due beyond 12 months. On the other hand, it had cash of CN¥7.83m and CN¥59.3m worth of receivables due within a year. So it has liabilities totalling CN¥57.5m more than its cash and near-term receivables, combined.

Vital Innovations Holdings has a market capitalization of CN¥202.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Vital Innovations 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.

View our latest analysis for Vital Innovations Holdings

In the last year Vital Innovations Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 3.9%, to CN¥1.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Vital Innovations Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥15m. 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 CN¥11m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Vital Innovations Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.