Is Vitasoy International Holdings (HKG:345) Weighed On By Its Debt Load?

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.' 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?

When Is Debt A Problem?

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. 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.

View our latest analysis for Vitasoy International Holdings

What Is Vitasoy International Holdings's Net Debt?

As you can see below, at the end of September 2021, Vitasoy International Holdings had HK$286.5m of debt, up from HK$36.9m a year ago. Click the image for more detail. But on the other hand it also has HK$799.9m in cash, leading to a HK$513.5m net cash position.

How Strong Is Vitasoy International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Vitasoy International Holdings had liabilities of HK$2.98b falling due within a year, and liabilities of HK$205.6m due beyond that. On the other hand, it had cash of HK$799.9m and HK$1.26b worth of receivables due within a year. So it has liabilities totalling HK$1.13b more than its cash and near-term receivables, combined.

Of course, Vitasoy International Holdings has a market capitalization of HK$17.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Vitasoy International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Vitasoy International Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.5%, to HK$6.7b. We would much prefer see growth.

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$610m. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Vitasoy International Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.