Here's Why Vizione Holdings Berhad (KLSE:VIZIONE) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Vizione Holdings Berhad (KLSE:VIZIONE) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Vizione Holdings Berhad

How Much Debt Does Vizione Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Vizione Holdings Berhad had RM37.5m of debt in November 2020, down from RM69.4m, one year before. On the flip side, it has RM11.4m in cash leading to net debt of about RM26.1m.

A Look At Vizione Holdings Berhad's Liabilities

According to the last reported balance sheet, Vizione Holdings Berhad had liabilities of RM262.6m due within 12 months, and liabilities of RM27.4m due beyond 12 months. On the other hand, it had cash of RM11.4m and RM594.2m worth of receivables due within a year. So it can boast RM315.6m more liquid assets than total liabilities.

This luscious liquidity implies that Vizione Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vizione Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Vizione Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM272m, which is a fall of 43%. That makes us nervous, to say the least.

Caveat Emptor

While Vizione Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM1.5m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and 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. Be aware that Vizione Holdings Berhad is showing 3 warning signs in our investment analysis , you should know about...

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. 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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