Does VSTECS Holdings (HKG:856) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that VSTECS Holdings Limited (HKG:856) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for VSTECS Holdings

What Is VSTECS Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that VSTECS Holdings had HK$4.85b of debt in June 2021, down from HK$7.56b, one year before. But on the other hand it also has HK$5.45b in cash, leading to a HK$596.2m net cash position.

How Strong Is VSTECS Holdings' Balance Sheet?

The latest balance sheet data shows that VSTECS Holdings had liabilities of HK$19.6b due within a year, and liabilities of HK$189.9m falling due after that. On the other hand, it had cash of HK$5.45b and HK$13.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$714.2m.

Of course, VSTECS Holdings has a market capitalization of HK$10.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, VSTECS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, VSTECS Holdings grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine VSTECS Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While VSTECS Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, VSTECS Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that VSTECS Holdings has HK$596.2m in net cash. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in HK$2.7b. So is VSTECS Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for VSTECS Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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