Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) is in debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies 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 Vietnam Manufacturing and Export Processing (Holdings)
What is the net debt of Vietnam Manufacturing and Export Processing (Holdings)?
You can click on the graph below for historical figures, but it shows that in March 2022, Vietnam Manufacturing and Export Processing (Holdings) had $37.7 million in debt, an increase from 31, 4 million dollars, over one year. But on the other hand, he also has $51.5 million in cash, resulting in a net cash position of $13.7 million.
A look at the liabilities of Vietnam Manufacturing and Export Processing (Holdings)
The latest balance sheet data shows that Vietnam Manufacturing and Export Processing (Holdings) had liabilities of US$61.5 million due within one year, and liabilities of US$704.7,000 falling due by the after. On the other hand, it had a cash position of 51.5 million dollars and 31.6 million dollars of receivables at less than one year. He can therefore boast of having $20.8 million more in cash than total Passives.
This surplus strongly suggests that Vietnam Manufacturing and Export Processing (Holdings) has a rock-solid balance sheet (and debt is no problem). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. In short, Vietnam Manufacturing and Export Processing (Holdings) has clean cash, so it’s fair to say that it doesn’t have heavy debt! The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Vietnam Manufacturing and Export Processing (Holdings) will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Year-over-year, Vietnam Manufacturing and Export Processing (Holdings) recorded a loss in EBIT and saw its revenue drop to $92 million, a decline of 5.7%. We would much rather see growth.
So, how risky is manufacturing and export processing in Vietnam (Holdings)?
We have no doubt that loss-making companies are, in general, more risky than profitable companies. And last year, Vietnam Manufacturing and Export Processing (Holdings) posted a loss in earnings before interest and taxes (EBIT), actually. And during the same period, it recorded a negative free cash outflow of US$1.0 million and recorded a book loss of US$4.2 million. But at least it has $13.7 million on the balance sheet to spend on near-term growth. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with Vietnam Manufacturing and Export Processing (Holdings), and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.