Does Vitura Health (ASX:VIT) Have A Healthy Balance Sheet?

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. Importantly, Vitura Health Limited (ASX:VIT) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vitura Health

How Much Debt Does Vitura Health Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Vitura Health had AU$6.22m of debt, an increase on none, over one year. But on the other hand it also has AU$13.0m in cash, leading to a AU$6.78m net cash position.

How Strong Is Vitura Health's Balance Sheet?

According to the last reported balance sheet, Vitura Health had liabilities of AU$22.6m due within 12 months, and liabilities of AU$10.5m due beyond 12 months. Offsetting this, it had AU$13.0m in cash and AU$13.0m in receivables that were due within 12 months. So its liabilities total AU$7.20m more than the combination of its cash and short-term receivables.

Of course, Vitura Health has a market capitalization of AU$109.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Vitura Health also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Vitura Health has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vitura Health will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Vitura Health has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Vitura Health generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Vitura Health's liabilities, but we can be reassured by the fact it has has net cash of AU$6.78m. And it impressed us with free cash flow of AU$11m, being 80% of its EBIT. So we are not troubled with Vitura Health's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Vitura Health has 4 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.