These 4 Measures Indicate That ViTrox Corporation Berhad (KLSE:VITROX) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that ViTrox Corporation Berhad (KLSE:VITROX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See 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 RM46.9m at the end of September 2024, a reduction from RM67.1m over a year. But on the other hand it also has RM319.2m in cash, leading to a RM272.2m net cash position.

How Strong Is ViTrox Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, ViTrox Corporation Berhad had liabilities of RM135.3m due within 12 months, and liabilities of RM40.6m due beyond 12 months. Offsetting this, it had RM319.2m in cash and RM218.6m in receivables that were due within 12 months. So it actually has RM361.8m 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 28% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, ViTrox Corporation Berhad recorded free cash flow of 25% 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 RM272.2m in net cash and a decent-looking balance sheet. 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. To that end, you should learn about the 2 warning signs we've spotted with ViTrox Corporation Berhad (including 1 which is concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.