Is Vital Innovations Holdings (HKG:6133) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Vital Innovations Holdings Limited (HKG:6133) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vital Innovations Holdings

What Is Vital Innovations Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Vital Innovations Holdings had CN¥13.2m of debt in June 2021, down from CN¥21.1m, one year before. But it also has CN¥97.8m in cash to offset that, meaning it has CN¥84.6m net cash.

How Healthy Is Vital Innovations Holdings' Balance Sheet?

We can see from the most recent balance sheet that Vital Innovations Holdings had liabilities of CN¥107.3m falling due within a year, and liabilities of CN¥987.0k due beyond that. Offsetting this, it had CN¥97.8m in cash and CN¥2.76m in receivables that were due within 12 months. So it has liabilities totalling CN¥7.79m more than its cash and near-term receivables, combined.

Since publicly traded Vital Innovations Holdings shares are worth a total of CN¥247.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Vital Innovations Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Vital Innovations Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Vital Innovations Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to CN¥852m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Vital Innovations Holdings?

While Vital Innovations Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥3.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 Vital Innovations Holdings has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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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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