Is V V Food & BeverageLtd (SHSE:600300) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that V V Food & Beverage Co.,Ltd (SHSE:600300) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for V V Food & BeverageLtd

What Is V V Food & BeverageLtd's Net Debt?

As you can see below, V V Food & BeverageLtd had CN¥354.1m of debt at September 2024, down from CN¥555.1m a year prior. But it also has CN¥727.1m in cash to offset that, meaning it has CN¥373.1m net cash.

A Look At V V Food & BeverageLtd's Liabilities

We can see from the most recent balance sheet that V V Food & BeverageLtd had liabilities of CN¥974.6m falling due within a year, and liabilities of CN¥154.3m due beyond that. On the other hand, it had cash of CN¥727.1m and CN¥180.9m worth of receivables due within a year. So it has liabilities totalling CN¥220.8m more than its cash and near-term receivables, combined.

Given V V Food & BeverageLtd has a market capitalization of CN¥4.71b, 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. While it does have liabilities worth noting, V V Food & BeverageLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, V V Food & BeverageLtd grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is V V Food & BeverageLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While V V Food & BeverageLtd 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. Over the last three years, V V Food & BeverageLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about V V Food & BeverageLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥373.1m. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in -CN¥8.4m. So is V V Food & BeverageLtd's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for V V Food & BeverageLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.