Is Vital Innovations Holdings (HKG:6133) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Vital Innovations Holdings Limited (HKG:6133) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vital Innovations Holdings

How Much Debt Does Vital Innovations Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Vital Innovations Holdings had debt of CN¥24.3m, up from CN¥13.2m in one year. However, it does have CN¥73.6m in cash offsetting this, leading to net cash of CN¥49.4m.

A Look At Vital Innovations Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Vital Innovations Holdings had liabilities of CN¥89.1m due within 12 months and liabilities of CN¥4.60m due beyond that. Offsetting this, it had CN¥73.6m in cash and CN¥2.62m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥17.4m.

Given Vital Innovations Holdings has a market capitalization of CN¥184.7m, it's hard to believe these liabilities pose much 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 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.

Over 12 months, Vital Innovations Holdings reported revenue of CN¥1.0b, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Vital Innovations Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Vital Innovations Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥20m of cash and made a loss of CN¥20m. With only CN¥49.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Vital Innovations Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.