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. Importantly, Vitasoy International Holdings Limited (HKG:345) does carry debt. But is this debt a concern to shareholders?

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. 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.

Check out our latest analysis for Vitasoy International Holdings

How Much Debt Does Vitasoy International Holdings Carry?

As you can see below, Vitasoy International Holdings had HK$237.5m of debt at September 2023, down from HK$437.8m a year prior. But it also has HK$710.2m in cash to offset that, meaning it has HK$472.8m net cash.

How Strong Is Vitasoy International Holdings' Balance Sheet?

According to the last reported balance sheet, Vitasoy International Holdings had liabilities of HK$2.37b due within 12 months, and liabilities of HK$212.4m due beyond 12 months. Offsetting this, it had HK$710.2m in cash and HK$1.12b in receivables that were due within 12 months. So its liabilities total HK$757.6m more than the combination of its cash and short-term receivables.

Of course, Vitasoy International Holdings has a market capitalization of HK$9.01b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Vitasoy International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Vitasoy International Holdings improved its EBIT from a last year's loss to a positive HK$1.9m. 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 Vitasoy International Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vitasoy International Holdings 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. Over the last year, Vitasoy International Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Vitasoy International Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$472.8m. And it impressed us with free cash flow of HK$315m, being 16,678% of its EBIT. So we don't have any problem with Vitasoy International Holdings'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. For example - Vitasoy International Holdings has 1 warning sign we think you should be aware of.

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.