Does ViTrox Corporation Berhad (KLSE:VITROX) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 ViTrox Corporation Berhad (KLSE:VITROX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ViTrox Corporation Berhad

What Is ViTrox Corporation Berhad's Debt?

As you can see below, ViTrox Corporation Berhad had RM34.9m of debt at December 2021, down from RM40.6m a year prior. However, it does have RM255.9m in cash offsetting this, leading to net cash of RM221.0m.

A Look At ViTrox Corporation Berhad's Liabilities

We can see from the most recent balance sheet that ViTrox Corporation Berhad had liabilities of RM204.9m falling due within a year, and liabilities of RM30.9m due beyond that. Offsetting these obligations, it had cash of RM255.9m as well as receivables valued at RM233.0m due within 12 months. So it actually has RM253.3m more liquid assets than total liabilities.

This surplus suggests that ViTrox Corporation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ViTrox Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that ViTrox Corporation Berhad has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ViTrox Corporation Berhad 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ViTrox Corporation Berhad 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, ViTrox Corporation Berhad's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case ViTrox Corporation Berhad has RM221.0m in net cash and a decent-looking balance sheet. So we are not troubled with ViTrox Corporation Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with ViTrox Corporation Berhad .

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.