Is Vitasoy International Holdings (HKG:345) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Vitasoy International Holdings Limited (HKG:345) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vitasoy International Holdings

What Is Vitasoy International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Vitasoy International Holdings had HK$437.8m of debt, an increase on HK$286.5m, over one year. However, its balance sheet shows it holds HK$898.3m in cash, so it actually has HK$460.4m net cash.

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$2.76b due within 12 months and liabilities of HK$227.8m due beyond that. Offsetting these obligations, it had cash of HK$898.3m as well as receivables valued at HK$1.26b due within 12 months. So it has liabilities totalling HK$824.6m more than its cash and near-term receivables, combined.

Given Vitasoy International Holdings has a market capitalization of HK$17.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Vitasoy International Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.6%, to HK$6.5b. That's not what we would hope to see.

So How Risky Is Vitasoy International Holdings?

Although Vitasoy International Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$70m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Vitasoy International Holdings's profit, revenue, and operating cashflow have changed over the last few years.

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.