ViTrox Corporation Berhad (KLSE:VITROX) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ViTrox Corporation Berhad (KLSE:VITROX) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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?

As you can see below, ViTrox Corporation Berhad had RM43.9m of debt at September 2020, down from RM51.7m a year prior. But it also has RM231.9m in cash to offset that, meaning it has RM187.9m net cash.

How Healthy Is ViTrox Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that ViTrox Corporation Berhad had liabilities of RM109.5m falling due within a year, and liabilities of RM40.1m due beyond that. On the other hand, it had cash of RM231.9m and RM148.7m worth of receivables due within a year. So it actually has RM230.9m 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!

Fortunately, ViTrox Corporation Berhad grew its EBIT by 2.5% in the last year, making that debt load look even more manageable. 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, 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. In the last three years, ViTrox Corporation Berhad's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ViTrox Corporation Berhad has net cash of RM187.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 2.5% over the last year. So we are not troubled with ViTrox Corporation Berhad's debt use. 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.

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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