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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that ViTrox Corporation Berhad (KLSE:VITROX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ViTrox Corporation Berhad

How Much Debt Does ViTrox Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that ViTrox Corporation Berhad had RM60.9m of debt in March 2024, down from RM69.4m, one year before. But on the other hand it also has RM336.2m in cash, leading to a RM275.3m net cash position.

How Strong Is ViTrox Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that ViTrox Corporation Berhad had liabilities of RM139.0m falling due within a year, and liabilities of RM52.7m due beyond that. Offsetting this, it had RM336.2m in cash and RM213.4m in receivables that were due within 12 months. So it actually has RM357.9m 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. 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.

In fact ViTrox Corporation Berhad's saving grace is its low debt levels, because its EBIT has tanked 61% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 31% 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 RM275.3m, as well as more liquid assets than liabilities. So we don't have any problem with ViTrox Corporation Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for ViTrox Corporation Berhad that you should be aware of before investing here.

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.