Is ViTrox Corporation Berhad (KLSE:VITROX) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is ViTrox Corporation Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 ViTrox Corporation Berhad had RM76.9m of debt, an increase on RM38.4m, over one year. But on the other hand it also has RM299.1m in cash, leading to a RM222.2m net cash position.

A Look At ViTrox Corporation Berhad's Liabilities

We can see from the most recent balance sheet that ViTrox Corporation Berhad had liabilities of RM258.6m falling due within a year, and liabilities of RM65.5m due beyond that. On the other hand, it had cash of RM299.1m and RM303.2m worth of receivables due within a year. So it actually has RM278.2m 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!

On top of that, ViTrox Corporation Berhad grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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, 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 32% 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 RM222.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 34% year-on-year EBIT growth. 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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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.