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. As with many other companies ViTrox Corporation Berhad (KLSE:VITROX) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ViTrox Corporation Berhad

What Is ViTrox Corporation Berhad's Net Debt?

As you can see below, ViTrox Corporation Berhad had RM57.3m of debt at June 2024, down from RM70.3m a year prior. But it also has RM351.8m in cash to offset that, meaning it has RM294.5m net cash.

A Look At ViTrox Corporation Berhad's Liabilities

According to the last reported balance sheet, ViTrox Corporation Berhad had liabilities of RM152.6m due within 12 months, and liabilities of RM49.2m due beyond 12 months. Offsetting these obligations, it had cash of RM351.8m as well as receivables valued at RM204.7m due within 12 months. So it can boast RM354.7m 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. Simply put, the fact that ViTrox Corporation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for ViTrox Corporation Berhad if management cannot prevent a repeat of the 27% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, ViTrox Corporation Berhad recorded free cash flow of 28% of its EBIT, which is weaker 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 RM294.5m in net cash and a decent-looking balance sheet. So we are not troubled with ViTrox Corporation Berhad's debt use. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.