These 4 Measures Indicate That Vitasoy International Holdings (HKG:345) Is Using Debt Safely

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.' 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. As with many other companies Vitasoy International Holdings Limited (HKG:345) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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?

The image below, which you can click on for greater detail, shows that at September 2024 Vitasoy International Holdings had debt of HK$405.2m, up from HK$237.5m in one year. But on the other hand it also has HK$1.34b in cash, leading to a HK$934.5m net cash position.

A Look At Vitasoy International Holdings' Liabilities

According to the last reported balance sheet, Vitasoy International Holdings had liabilities of HK$2.43b due within 12 months, and liabilities of HK$377.0m due beyond 12 months. Offsetting these obligations, it had cash of HK$1.34b as well as receivables valued at HK$1.02b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$447.6m.

Of course, Vitasoy International Holdings has a market capitalization of HK$10.2b, 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!

Even more impressive was the fact that Vitasoy International Holdings grew its EBIT by 569% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vitasoy International Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Vitasoy International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Vitasoy International Holdings 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vitasoy International Holdings has HK$934.5m in net cash. And it impressed us with free cash flow of HK$681m, being 338% of its EBIT. So we don't think Vitasoy International Holdings's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vitasoy International Holdings's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.