Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that VS Industrie Berhad (KLSE: VS) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Discover our latest analysis for VS Industry Berhad
What is the debt of VS Industry Berhad?
The image below, which you can click for more details, shows that VS Industry Berhad had a debt of RM 300.9 million at the end of January 2021, a reduction from RM 381.2 million. over a year. But he also has RM485.9million in cash to make up for this, which means he has a net cash of RM185.0million.
How healthy is VS Industry Berhad’s balance sheet?
The latest balance sheet data shows that VS Industry Berhad had debts of RM 997.1 million due within one year, and debts of RM 157.0 million due after that. As compensation for these obligations, he had cash of RM 485.9 million as well as receivables valued at RM 1.12 billion due within 12 months. So it actually has RM449.8m After liquid assets as total liabilities.
This short-term liquidity is a sign that VS Industry Berhad could probably repay its debt easily, as its balance sheet is far from tight. Put simply, the fact that VS Industry Berhad has more cash than debt is arguably a good indication that it can safely manage its debt.
VS Industry Berhad’s EBIT has been fairly stable over the past year, but that shouldn’t be a problem considering it doesn’t have a lot of debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether VS Industry Berhad can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although VS Industry Berhad has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years, VS Industry Berhad has recorded free cash flow of 57% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
While it is always a good idea to investigate a company’s debt, in this case VS Industry Berhad has RM185.0million in net cash and a decent balance sheet. So is VS Industry Berhad’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – VS Industry Berhad a 1 warning sign we think you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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