Is VIP Clothing (NSE:VIPCLOTHNG) Weighed On By Its Debt Load?

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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies VIP Clothing Limited (NSE:VIPCLOTHNG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for VIP Clothing

What Is VIP Clothing's Debt?

You can click the graphic below for the historical numbers, but it shows that VIP Clothing had ₹787.3m of debt in March 2020, down from ₹827.8m, one year before. However, it does have ₹44.7m in cash offsetting this, leading to net debt of about ₹742.6m.

A Look At VIP Clothing's Liabilities

We can see from the most recent balance sheet that VIP Clothing had liabilities of ₹1.08b falling due within a year, and liabilities of ₹281.1m due beyond that. On the other hand, it had cash of ₹44.7m and ₹492.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹819.7m.

Given this deficit is actually higher than the company's market capitalization of ₹799.5m, we think shareholders really should watch VIP Clothing's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is VIP Clothing's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year VIP Clothing had negative earnings before interest and tax, and actually shrunk its revenue by 16%, to ₹1.8b. We would much prefer see growth.

Caveat Emptor

Not only did VIP Clothing's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹172m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₹150m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for VIP Clothing (of which 1 doesn't sit too well with us!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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