Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Vesync Co., Ltd (HKG:2148) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Vesync Carry?
As you can see below, at the end of December 2023, Vesync had US$29.8m of debt, up from US$9.24m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$137.1m in cash, so it actually has US$107.3m net cash.
How Strong Is Vesync's Balance Sheet?
The latest balance sheet data shows that Vesync had liabilities of US$228.2m due within a year, and liabilities of US$9.37m falling due after that. On the other hand, it had cash of US$137.1m and US$192.4m worth of receivables due within a year. So it can boast US$91.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Vesync could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vesync boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Vesync made a loss at the EBIT level, last year, it was also good to see that it generated US$92m in EBIT over the last twelve months. 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 Vesync 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vesync 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. Over the most recent year, Vesync recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case Vesync has US$107.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$63m, being 69% of its EBIT. So is Vesync's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Vesync .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.