Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Viva Goods's Net Debt?

The image below, which you can click on for greater detail, shows that Viva Goods had debt of HK$187.2m at the end of December 2023, a reduction from HK$344.1m over a year. However, its balance sheet shows it holds HK$1.28b in cash, so it actually has HK$1.09b net cash.

How Strong Is Viva Goods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Viva Goods had liabilities of HK$3.80b due within 12 months and liabilities of HK$1.86b due beyond that. Offsetting this, it had HK$1.28b in cash and HK$766.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$3.61b.

Viva Goods has a market capitalization of HK$7.19b, so it could very likely raise cash to ameliorate 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! 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 63%, to HK$11b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Viva Goods?

While Viva Goods lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$79m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too 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. For riskier companies like Viva Goods I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.