Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that V V Food & Beverage Co.,Ltd (SHSE:600300) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

What Is V V Food & BeverageLtd's Net Debt?

The image below, which you can click on for greater detail, shows that V V Food & BeverageLtd had debt of CN¥555.1m at the end of September 2023, a reduction from CN¥979.7m over a year. But on the other hand it also has CN¥897.8m in cash, leading to a CN¥342.7m net cash position.

A Look At V V Food & BeverageLtd's Liabilities

The latest balance sheet data shows that V V Food & BeverageLtd had liabilities of CN¥1.18b due within a year, and liabilities of CN¥337.2m falling due after that. On the other hand, it had cash of CN¥897.8m and CN¥167.8m worth of receivables due within a year. So it has liabilities totalling CN¥450.7m more than its cash and near-term receivables, combined.

Of course, V V Food & BeverageLtd has a market capitalization of CN¥4.43b, so these liabilities are probably manageable. 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, V V Food & BeverageLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, V V Food & BeverageLtd grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is V V Food & BeverageLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While V V Food & BeverageLtd 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. Happily for any shareholders, V V Food & BeverageLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although V V Food & BeverageLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥342.7m. And it impressed us with free cash flow of CN¥785m, being 133% of its EBIT. So we don't think V V Food & BeverageLtd's use of debt is risky. 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 V V Food & BeverageLtd's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.