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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that V.S. International Group Limited (HKG:1002) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for V.S. International Group
What Is V.S. International Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of January 2019 V.S. International Group had CN¥229.0m of debt, an increase on CN¥168.9m, over one year. However, it does have CN¥59.0m in cash offsetting this, leading to net debt of about CN¥170.0m.
How Healthy Is V.S. International Group's Balance Sheet?
The latest balance sheet data shows that V.S. International Group had liabilities of CN¥372.6m due within a year, and liabilities of CN¥10.2m falling due after that. Offsetting these obligations, it had cash of CN¥59.0m as well as receivables valued at CN¥175.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥148.5m.
This deficit isn't so bad because V.S. International Group is worth CN¥393.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 V.S. International Group 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.
Over 12 months, V.S. International Group saw its revenue drop to CN¥820m, which is a fall of 35%. To be frank that doesn't bode well.