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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 note that Vedan International (Holdings) Limited (HKG:2317) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Vedan International (Holdings)
What Is Vedan International (Holdings)'s Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Vedan International (Holdings) had debt of US$38.2m, up from US$34.3m in one year. However, it does have US$37.5m in cash offsetting this, leading to net debt of about US$714.0k.
How Strong Is Vedan International (Holdings)'s Balance Sheet?
According to the last reported balance sheet, Vedan International (Holdings) had liabilities of US$50.2m due within 12 months, and liabilities of US$20.5m due beyond 12 months. On the other hand, it had cash of US$37.5m and US$36.9m worth of receivables due within a year. So it can boast US$3.71m more liquid assets than total liabilities.
This surplus suggests that Vedan International (Holdings) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. But either way, Vedan International (Holdings) has virtually no net debt, so it's fair to say it does not have a heavy debt load!
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.