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. As with many other companies Viva Goods Company Limited (HKG:933) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Viva Goods

What Is Viva Goods's 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, its balance sheet shows it holds HK$1.48b in cash, so it actually has HK$679.5m net cash.

How Strong Is Viva Goods' Balance Sheet?

According to the last reported balance sheet, Viva Goods had liabilities of HK$3.69b due within 12 months, and liabilities of HK$2.42b due beyond 12 months. On the other hand, it had cash of HK$1.48b and HK$820.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$3.80b.

While this might seem like a lot, it is not so bad since Viva Goods has a market capitalization of HK$8.65b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Viva Goods boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Viva Goods will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Viva Goods wasn't profitable at an EBIT level, but managed to grow its revenue by 704%, to HK$12b. That's virtually the hole-in-one of revenue growth!

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. The good news for Viva Goods shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Viva Goods has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.