Health Check: How Prudently Does Vince Holding (NYSE:VNCE) Use Debt?

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.' 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 can see that Vince Holding Corp. (NYSE:VNCE) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Vince Holding

What Is Vince Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Vince Holding had US$86.0m in debt in May 2021; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Vince Holding's Balance Sheet?

The latest balance sheet data shows that Vince Holding had liabilities of US$85.8m due within a year, and liabilities of US$185.0m falling due after that. Offsetting these obligations, it had cash of US$1.37m as well as receivables valued at US$26.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$242.7m.

This deficit casts a shadow over the US$142.8m 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, Vince Holding would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vince Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Vince Holding made a loss at the EBIT level, and saw its revenue drop to US$238m, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Vince Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$19m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$22m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 3 warning signs for Vince Holding you should be aware of, and 1 of them is a bit unpleasant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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