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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that ViTrox Corporation Berhad (KLSE:VITROX) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ViTrox Corporation Berhad

How Much Debt Does ViTrox Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2022 ViTrox Corporation Berhad had debt of RM77.3m, up from RM36.9m in one year. However, it does have RM324.2m in cash offsetting this, leading to net cash of RM246.9m.

A Look At ViTrox Corporation Berhad's Liabilities

According to the last reported balance sheet, ViTrox Corporation Berhad had liabilities of RM225.9m due within 12 months, and liabilities of RM65.0m due beyond 12 months. Offsetting this, it had RM324.2m in cash and RM285.7m in receivables that were due within 12 months. So it actually has RM319.1m more liquid assets than total liabilities.

This short term liquidity is a sign that ViTrox Corporation Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ViTrox Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, ViTrox Corporation Berhad grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ViTrox Corporation Berhad 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ViTrox Corporation Berhad 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. In the last three years, ViTrox Corporation Berhad's free cash flow amounted to 35% 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 RM246.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 32% over the last year. So we don't think ViTrox Corporation Berhad'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 ViTrox Corporation Berhad'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.