Here's Why Vimta Labs (NSE:VIMTALABS) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Vimta Labs Limited (NSE:VIMTALABS) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Vimta Labs

How Much Debt Does Vimta Labs Carry?

The image below, which you can click on for greater detail, shows that at March 2020 Vimta Labs had debt of ₹332.6m, up from ₹258.3m in one year. However, because it has a cash reserve of ₹55.1m, its net debt is less, at about ₹277.5m.

How Healthy Is Vimta Labs's Balance Sheet?

The latest balance sheet data shows that Vimta Labs had liabilities of ₹575.6m due within a year, and liabilities of ₹152.5m falling due after that. Offsetting these obligations, it had cash of ₹55.1m as well as receivables valued at ₹650.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹23.0m.

This state of affairs indicates that Vimta Labs's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹2.37b company is short on cash, but still worth keeping an eye on the balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 1.1 times EBITDA, it is initially surprising to see that Vimta Labs's EBIT has low interest coverage of 1.4 times. So one way or the other, it's clear the debt levels are not trivial. Importantly, Vimta Labs's EBIT fell a jaw-dropping 83% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Vimta Labs'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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Vimta Labs produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Both Vimta Labs's EBIT growth rate and its interest cover were discouraging. At least its net debt to EBITDA gives us reason to be optimistic. We think that Vimta Labs's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 instance, we've identified 3 warning signs for Vimta Labs that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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