We Think Vipshop Holdings (NYSE:VIPS) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Vipshop Holdings Limited (NYSE:VIPS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Vipshop Holdings

What Is Vipshop Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Vipshop Holdings had CN¥2.49b of debt, an increase on CN¥999.2m, over one year. However, it does have CN¥27.0b in cash offsetting this, leading to net cash of CN¥24.5b.

How Strong Is Vipshop Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vipshop Holdings had liabilities of CN¥28.5b due within 12 months and liabilities of CN¥3.07b due beyond that. Offsetting these obligations, it had cash of CN¥27.0b as well as receivables valued at CN¥3.76b due within 12 months. So it has liabilities totalling CN¥795.7m more than its cash and near-term receivables, combined.

Having regard to Vipshop Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥62.9b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

On top of that, Vipshop Holdings grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. 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 Vipshop Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vipshop Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Vipshop Holdings generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vipshop Holdings has CN¥24.5b in net cash. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in CN¥9.2b. So we don't think Vipshop Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Vipshop Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.