ViTrox Corporation Berhad (KLSE:VITROX) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies ViTrox Corporation Berhad (KLSE:VITROX) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ViTrox Corporation Berhad

What Is ViTrox Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that ViTrox Corporation Berhad had debt of RM67.1m at the end of September 2023, a reduction from RM77.3m over a year. But it also has RM426.4m in cash to offset that, meaning it has RM359.3m net cash.

A Look At ViTrox Corporation Berhad's Liabilities

We can see from the most recent balance sheet that ViTrox Corporation Berhad had liabilities of RM165.3m falling due within a year, and liabilities of RM58.6m due beyond that. Offsetting this, it had RM426.4m in cash and RM191.9m in receivables that were due within 12 months. So it can boast RM394.5m 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.

On the other hand, ViTrox Corporation Berhad saw its EBIT drop by 9.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. In the last three years, ViTrox Corporation Berhad's free cash flow amounted to 39% 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 RM359.3m 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.