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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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 RM70.3m of debt at June 2023, down from RM76.9m a year prior. However, it does have RM420.9m in cash offsetting this, leading to net cash of RM350.6m.

How Strong Is ViTrox Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that ViTrox Corporation Berhad had liabilities of RM206.9m due within a year, and liabilities of RM60.7m falling due after that. Offsetting these obligations, it had cash of RM420.9m as well as receivables valued at RM212.4m due within 12 months. So it actually has RM365.6m 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!

While ViTrox Corporation Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 ViTrox Corporation Berhad'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, while the tax-man may adore accounting profits, lenders only accept 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 38% 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 investigate a company's debt, in this case ViTrox Corporation Berhad has RM350.6m in net cash and a decent-looking balance sheet. So we don't have any problem with ViTrox Corporation Berhad's use of debt. 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.

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.