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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that V V Food & BeverageLtd had debt of CN¥354.1m at the end of September 2024, a reduction from CN¥555.1m over a year. However, it does have CN¥727.1m in cash offsetting this, leading to net cash of CN¥373.1m.

How Healthy Is V V Food & BeverageLtd's Balance Sheet?

The latest balance sheet data shows that V V Food & BeverageLtd had liabilities of CN¥974.6m due within a year, and liabilities of CN¥154.3m falling due after that. Offsetting these obligations, it had cash of CN¥727.1m as well as receivables valued at CN¥180.9m due within 12 months. So its liabilities total CN¥220.8m more than the combination of its cash and short-term receivables.

Since publicly traded V V Food & BeverageLtd shares are worth a total of CN¥4.74b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, V V Food & BeverageLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, V V Food & BeverageLtd grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since V V Food & BeverageLtd will need earnings to service that debt. 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. V V Food & BeverageLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, V V Food & BeverageLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that V V Food & BeverageLtd has CN¥373.1m in net cash. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in -CN¥8.4m. So we don't think V V Food & BeverageLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with V V Food & BeverageLtd .

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.