We Think Vital Innovations Holdings (HKG:6133) 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.' 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 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.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Vital Innovations Holdings

What Is Vital Innovations Holdings's Debt?

As you can see below, at the end of June 2023, Vital Innovations Holdings had CN¥25.3m of debt, up from CN¥24.3m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥19.1m, its net debt is less, at about CN¥6.20m.

How Healthy Is Vital Innovations Holdings' Balance Sheet?

The latest balance sheet data shows that Vital Innovations Holdings had liabilities of CN¥109.2m due within a year, and liabilities of CN¥173.0k falling due after that. Offsetting these obligations, it had cash of CN¥19.1m as well as receivables valued at CN¥2.67m due within 12 months. So it has liabilities totalling CN¥87.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Vital Innovations Holdings is worth CN¥214.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Vital Innovations Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥745m, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Vital Innovations Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥17m at the EBIT level. 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. However, it doesn't help that it burned through CN¥56m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Vital Innovations Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.