Vitasoy International Holdings (HKG:345) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 Vitasoy International Holdings had HK$36.9m of debt in September 2020, down from HK$48.2m, one year before. But it also has HK$648.0m in cash to offset that, meaning it has HK$611.1m 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$2.63b due within 12 months and liabilities of HK$283.1m due beyond that. Offsetting this, it had HK$648.0m in cash and HK$1.39b in receivables that were due within 12 months. So its liabilities total HK$876.4m more than the combination of its cash and short-term receivables.

Given Vitasoy International Holdings has a market capitalization of HK$35.9b, it's hard to believe these liabilities pose much threat. 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!

But the other side of the story is that Vitasoy International Holdings saw its EBIT decline by 8.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Vitasoy International Holdings's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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$611.1m in net cash. So we are not troubled with Vitasoy International Holdings's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Vitasoy International Holdings you should know about.

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. 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.
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