Vipshop Holdings (NYSE:VIPS) Seems To Use Debt Rather Sparingly

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. Importantly, Vipshop Holdings Limited (NYSE:VIPS) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vipshop Holdings

What Is Vipshop Holdings's Net Debt?

As you can see below, at the end of December 2022, Vipshop Holdings had CN¥2.83b of debt, up from CN¥2.12b a year ago. Click the image for more detail. However, it does have CN¥24.2b in cash offsetting this, leading to net cash of CN¥21.3b.

A Look At Vipshop Holdings' Liabilities

The latest balance sheet data shows that Vipshop Holdings had liabilities of CN¥28.5b due within a year, and liabilities of CN¥2.88b falling due after that. On the other hand, it had cash of CN¥24.2b and CN¥2.13b worth of receivables due within a year. So its liabilities total CN¥5.11b more than the combination of its cash and short-term receivables.

Since publicly traded Vipshop Holdings shares are worth a total of CN¥58.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Vipshop Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Vipshop Holdings grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vipshop Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Vipshop Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Vipshop Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Vipshop Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥21.3b. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in CN¥7.4b. So we don't think Vipshop Holdings's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vipshop Holdings's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.