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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Vitasoy International Holdings Limited (HKG:345) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vitasoy International Holdings

How Much Debt Does Vitasoy International Holdings Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Vitasoy International Holdings had debt of HK$489.8m, up from HK$130.3m in one year. But on the other hand it also has HK$621.9m in cash, leading to a HK$132.0m net cash position.

How Strong Is Vitasoy International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vitasoy International Holdings had liabilities of HK$3.03b due within 12 months and liabilities of HK$206.4m due beyond that. On the other hand, it had cash of HK$621.9m and HK$1.16b worth of receivables due within a year. So its liabilities total HK$1.46b more than the combination of its cash and short-term receivables.

Given Vitasoy International Holdings has a market capitalization of HK$12.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Vitasoy International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Vitasoy International Holdings 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.

Over 12 months, Vitasoy International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$6.5b, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is Vitasoy International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Vitasoy International Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$285m and booked a HK$159m accounting loss. With only HK$132.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Vitasoy International Holdings's profit, revenue, and operating cashflow have changed over the last few years.

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.