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 Vantone Neo Development Group Co., Ltd. (SHSE:600246) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Vantone Neo Development Group's Net Debt?
As you can see below, Vantone Neo Development Group had CN¥1.83b of debt at December 2023, down from CN¥1.97b a year prior. However, it also had CN¥1.45b in cash, and so its net debt is CN¥379.1m.
How Strong Is Vantone Neo Development Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Vantone Neo Development Group had liabilities of CN¥1.02b due within 12 months and liabilities of CN¥1.81b due beyond that. Offsetting this, it had CN¥1.45b in cash and CN¥648.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥729.4m.
Given Vantone Neo Development Group has a market capitalization of CN¥14.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vantone Neo Development Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Vantone Neo Development Group reported revenue of CN¥487m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Vantone Neo Development Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥133m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥390m into a profit. So we do think this stock is quite risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Vantone Neo Development Group's profit, revenue, and operating cashflow have changed over the last few years.
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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