Is Vibrant Group (SGX:BIP) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Vibrant Group Limited (SGX:BIP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Vibrant Group

What Is Vibrant Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Vibrant Group had S$106.4m of debt in October 2020, down from S$126.2m, one year before. However, it also had S$76.0m in cash, and so its net debt is S$30.5m.

How Healthy Is Vibrant Group's Balance Sheet?

The latest balance sheet data shows that Vibrant Group had liabilities of S$139.9m due within a year, and liabilities of S$212.8m falling due after that. On the other hand, it had cash of S$76.0m and S$60.0m worth of receivables due within a year. So its liabilities total S$216.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the S$67.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Vibrant Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vibrant Group'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 Vibrant Group had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to S$145m. We would much prefer see growth.

Caveat Emptor

Importantly, Vibrant Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$17m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost S$22m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Vibrant Group (1 shouldn't be ignored) you should be aware of.

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. 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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