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.' 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 VNET Group, Inc. (NASDAQ:VNET) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does VNET Group Carry?
As you can see below, VNET Group had CN¥10.5b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.88b in cash, and so its net debt is CN¥8.62b.
A Look At VNET Group's Liabilities
Zooming in on the latest balance sheet data, we can see that VNET Group had liabilities of CN¥8.14b due within 12 months and liabilities of CN¥14.4b due beyond that. Offsetting this, it had CN¥1.88b in cash and CN¥2.15b in receivables that were due within 12 months. So its liabilities total CN¥18.5b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥7.36b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, VNET Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine VNET Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year VNET Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to CN¥7.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months VNET Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥67m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥2.2b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with VNET Group (including 1 which can't be ignored) .
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.
