Is Vinvest Capital Holdings Berhad (KLSE:VINVEST) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Vinvest Capital Holdings Berhad (KLSE:VINVEST) does carry debt. But is this debt a concern to shareholders?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vinvest Capital Holdings Berhad

How Much Debt Does Vinvest Capital Holdings Berhad Carry?

As you can see below, Vinvest Capital Holdings Berhad had RM37.9m of debt at December 2022, down from RM74.2m a year prior. But on the other hand it also has RM53.7m in cash, leading to a RM15.8m net cash position.

How Healthy Is Vinvest Capital Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Vinvest Capital Holdings Berhad had liabilities of RM105.0m due within 12 months, and liabilities of RM25.6m due beyond 12 months. On the other hand, it had cash of RM53.7m and RM233.1m worth of receivables due within a year. So it actually has RM156.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Vinvest Capital Holdings Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Vinvest Capital Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vinvest Capital Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Vinvest Capital Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to RM77m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Vinvest Capital Holdings Berhad?

While Vinvest Capital Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM22m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We also take heart from the solid 21% revenue growth in 12 months; undoubtedly a good sign. That growth could mean this is one stock well worth watching. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Vinvest Capital Holdings Berhad (1 is concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.