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.' 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. We note that Venky's (India) Limited (NSE:VENKEYS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Venky's (India)
What Is Venky's (India)'s Net Debt?
As you can see below, Venky's (India) had ₹2.75b of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹1.71b in cash, and so its net debt is ₹1.04b.
How Healthy Is Venky's (India)'s Balance Sheet?
The latest balance sheet data shows that Venky's (India) had liabilities of ₹7.05b due within a year, and liabilities of ₹555.7m falling due after that. On the other hand, it had cash of ₹1.71b and ₹4.50b worth of receivables due within a year. So its liabilities total ₹1.4b more than the combination of its cash and short-term receivables.
Since publicly traded Venky's (India) shares are worth a total of ₹14.8b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Venky's (India) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Venky's (India) wasn't profitable at an EBIT level, but managed to grow its revenue by 7.1%, to ₹33b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Venky's (India) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹556.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹255.0m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like Venky's (India) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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About NSEI:VENKEYS
Venky's (India)
Primarily engages in the production and sale of poultry products in India and internationally.
Flawless balance sheet, good value and pays a dividend.
