Here's Why Vitasoy International Holdings (HKG:345) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Vitasoy International Holdings Limited (HKG:345) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Vitasoy International Holdings

How Much Debt Does Vitasoy International Holdings Carry?

As you can see below, Vitasoy International Holdings had HK$237.5m of debt at September 2023, down from HK$437.8m a year prior. However, it does have HK$710.2m in cash offsetting this, leading to net cash of HK$472.8m.

How Strong Is Vitasoy International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vitasoy International Holdings had liabilities of HK$2.37b due within 12 months and liabilities of HK$212.4m due beyond that. Offsetting these obligations, it had cash of HK$710.2m as well as receivables valued at HK$1.12b due within 12 months. So its liabilities total HK$757.6m more than the combination of its cash and short-term receivables.

Of course, Vitasoy International Holdings has a market capitalization of HK$7.74b, so these liabilities are probably manageable. 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, Vitasoy International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Vitasoy International Holdings improved its EBIT from a last year's loss to a positive HK$32m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Vitasoy International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vitasoy International Holdings 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. Happily for any shareholders, Vitasoy International Holdings actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vitasoy International Holdings has HK$472.8m in net cash. The cherry on top was that in converted 1,271% of that EBIT to free cash flow, bringing in HK$412m. So we don't have any problem with Vitasoy International Holdings's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Vitasoy International Holdings .

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.