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

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 Vitura Health Limited (ASX:VIT) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Vitura Health's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Vitura Health had AU$5.32m of debt, an increase on none, over one year. However, it does have AU$11.3m in cash offsetting this, leading to net cash of AU$6.03m.

How Healthy Is Vitura Health's Balance Sheet?

We can see from the most recent balance sheet that Vitura Health had liabilities of AU$23.4m falling due within a year, and liabilities of AU$9.48m due beyond that. Offsetting these obligations, it had cash of AU$11.3m as well as receivables valued at AU$13.7m due within 12 months. So its liabilities total AU$7.75m more than the combination of its cash and short-term receivables.

Given Vitura Health has a market capitalization of AU$50.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Vitura Health boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Vitura Health's saving grace is its low debt levels, because its EBIT has tanked 75% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vitura Health's earnings that will influence how the balance sheet holds up in the future. 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. Vitura Health may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Vitura Health recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Vitura Health's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$6.03m. And it impressed us with free cash flow of AU$6.2m, being 81% of its EBIT. So we are not troubled with Vitura Health's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 5 warning signs we've spotted with Vitura Health .

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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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.