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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Viva Goods Company Limited (HKG:933) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Viva Goods

What Is Viva Goods's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Viva Goods had debt of HK$803.5m, up from HK$17.1m in one year. However, it does have HK$1.48b in cash offsetting this, leading to net cash of HK$679.5m.

How Strong Is Viva Goods' Balance Sheet?

We can see from the most recent balance sheet that Viva Goods had liabilities of HK$3.69b falling due within a year, and liabilities of HK$2.42b due beyond that. Offsetting these obligations, it had cash of HK$1.48b as well as receivables valued at HK$820.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$3.80b.

This deficit isn't so bad because Viva Goods is worth HK$12.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Viva Goods boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Viva Goods'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 Viva Goods wasn't profitable at an EBIT level, but managed to grow its revenue by 704%, to HK$12b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Viva Goods?

Although Viva Goods had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$1.0b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that Viva Goods is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Viva Goods (of which 1 is a bit concerning!) you should know about.

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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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.