Vivocom Intl Holdings Berhad (KLSE:VIVOCOM) Has Debt But No Earnings; Should You Worry?

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. 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. As with many other companies Vivocom Intl Holdings Berhad (KLSE:VIVOCOM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vivocom Intl Holdings Berhad

What Is Vivocom Intl Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 Vivocom Intl Holdings Berhad had RM22.9m of debt, an increase on RM33.1, over one year. But on the other hand it also has RM55.5m in cash, leading to a RM32.6m net cash position.

How Strong Is Vivocom Intl Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Vivocom Intl Holdings Berhad had liabilities of RM44.4m due within a year, and liabilities of RM20.2m falling due after that. Offsetting these obligations, it had cash of RM55.5m as well as receivables valued at RM280.0m due within 12 months. So it actually has RM270.8m more liquid assets than total liabilities.

This surplus strongly suggests that Vivocom Intl Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Vivocom Intl Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vivocom Intl 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 Vivocom Intl Holdings Berhad had negative earnings before interest and tax, and actually shrunk its revenue by 26%, to RM83m. To be frank that doesn't bode well.

So How Risky Is Vivocom Intl Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Vivocom Intl Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM39m of cash and made a loss of RM59m. However, it has net cash of RM32.6m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 3 warning signs for Vivocom Intl Holdings Berhad you should be aware of, and 1 of them is a bit concerning.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.