Is ViTrox Corporation Berhad (KLSE:VITROX) A Risky Investment?

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.' 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 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ViTrox Corporation Berhad

What Is ViTrox Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that ViTrox Corporation Berhad had debt of RM40.3m at the end of March 2021, a reduction from RM49.3m over a year. However, it does have RM236.5m in cash offsetting this, leading to net cash of RM196.2m.

A Look At ViTrox Corporation Berhad's Liabilities

According to the last reported balance sheet, ViTrox Corporation Berhad had liabilities of RM178.1m due within 12 months, and liabilities of RM36.1m due beyond 12 months. On the other hand, it had cash of RM236.5m and RM201.7m worth of receivables due within a year. So it can boast RM224.0m 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!

In addition to that, we're happy to report that ViTrox Corporation Berhad has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 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. Looking at the most recent three years, ViTrox Corporation Berhad recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ViTrox Corporation Berhad has net cash of RM196.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 33% over the last year. So is ViTrox Corporation Berhad's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in ViTrox Corporation Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

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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