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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Vital Innovations Holdings Limited (HKG:6133) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Vital Innovations Holdings

What Is Vital Innovations Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Vital Innovations Holdings had debt of CN¥13.2m at the end of June 2021, a reduction from CN¥21.1m over a year. But on the other hand it also has CN¥97.8m in cash, leading to a CN¥84.6m net cash position.

How Strong Is Vital Innovations Holdings' Balance Sheet?

The latest balance sheet data shows that Vital Innovations Holdings had liabilities of CN¥107.3m due within a year, and liabilities of CN¥987.0k falling due after that. Offsetting this, it had CN¥97.8m in cash and CN¥2.76m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.79m.

Of course, Vital Innovations Holdings has a market capitalization of CN¥222.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Vital Innovations Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

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. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Vital Innovations Holdings?

Although Vital Innovations Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥26m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 3 warning signs for Vital Innovations Holdings (of which 1 can't be ignored!) 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.