Is Vitasoy International Holdings (HKG:345) A Risky Investment?

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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vitasoy International Holdings

How Much Debt Does Vitasoy International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Vitasoy International Holdings had HK$489.8m of debt, an increase on HK$130.3m, over one year. But it also has HK$621.9m in cash to offset that, meaning it has HK$132.0m net cash.

A Look At Vitasoy International Holdings' Liabilities

The latest balance sheet data shows that Vitasoy International Holdings had liabilities of HK$3.03b due within a year, and liabilities of HK$206.4m falling due after that. Offsetting this, it had HK$621.9m in cash and HK$1.16b in receivables that were due within 12 months. So it has liabilities totalling HK$1.46b more than its cash and near-term receivables, combined.

Of course, Vitasoy International Holdings has a market capitalization of HK$12.5b, 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. Despite its noteworthy liabilities, Vitasoy International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vitasoy International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Vitasoy International Holdings had a loss before interest and tax, and actually shrunk its revenue by 14%, to HK$6.5b. We would much prefer see growth.

So How Risky Is Vitasoy International Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Vitasoy International Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$285m and booked a HK$159m accounting loss. Given it only has net cash of HK$132.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Vitasoy International Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.