Does V.S. Industry Berhad (KLSE:VS) Have A Healthy Balance Sheet?

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. As with many other companies V.S. Industry Berhad (KLSE:VS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for V.S. Industry Berhad

How Much Debt Does V.S. Industry Berhad Carry?

As you can see below, at the end of April 2021, V.S. Industry Berhad had RM394.9m of debt, up from RM287.4m a year ago. Click the image for more detail. But it also has RM431.2m in cash to offset that, meaning it has RM36.3m net cash.

How Strong Is V.S. Industry Berhad's Balance Sheet?

The latest balance sheet data shows that V.S. Industry Berhad had liabilities of RM1.13b due within a year, and liabilities of RM193.0m falling due after that. Offsetting this, it had RM431.2m in cash and RM1.28b in receivables that were due within 12 months. So it can boast RM387.7m more liquid assets than total liabilities.

This short term liquidity is a sign that V.S. Industry Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, V.S. Industry Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that V.S. Industry Berhad grew its EBIT by 115% over twelve months. That boost will make it even easier to pay down debt going forward. 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 V.S. Industry 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While V.S. Industry 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, V.S. Industry Berhad recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case V.S. Industry Berhad has RM36.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 115% over the last year. So we don't think V.S. Industry Berhad's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in V.S. Industry Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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