Is Vertical International Holdings (HKG:8375) Using Too Much Debt?

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. We can see that Vertical International Holdings Limited (HKG:8375) does use debt in its business. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Vertical International Holdings

What Is Vertical International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Vertical International Holdings had HK$14.6m of debt in December 2022, down from HK$16.7m, one year before. But on the other hand it also has HK$43.3m in cash, leading to a HK$28.6m net cash position.

How Healthy Is Vertical International Holdings' Balance Sheet?

The latest balance sheet data shows that Vertical International Holdings had liabilities of HK$32.5m due within a year, and liabilities of HK$42.0k falling due after that. Offsetting this, it had HK$43.3m in cash and HK$29.5m in receivables that were due within 12 months. So it actually has HK$40.2m more liquid assets than total liabilities.

This surplus strongly suggests that Vertical International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Vertical International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Vertical International 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 Vertical International Holdings had a loss before interest and tax, and actually shrunk its revenue by 40%, to HK$79m. That makes us nervous, to say the least.

So How Risky Is Vertical International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Vertical International Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$8.4m and booked a HK$20m accounting loss. With only HK$28.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Vertical International Holdings has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.