Would Venky's (India) (NSE:VENKEYS) Be Better Off With Less Debt?

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. Importantly, Venky's (India) Limited (NSE:VENKEYS) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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 Venky's (India)

What Is Venky's (India)'s Debt?

The chart below, which you can click on for greater detail, shows that Venky's (India) had ₹2.75b in debt in March 2020; about the same as the year before. However, it does have ₹1.71b in cash offsetting this, leading to net debt of about ₹1.04b.

How Healthy Is Venky's (India)'s Balance Sheet?

We can see from the most recent balance sheet that Venky's (India) had liabilities of ₹7.05b falling due within a year, and liabilities of ₹555.7m due beyond that. Offsetting these obligations, it had cash of ₹1.71b as well as receivables valued at ₹4.50b due within 12 months. So it has liabilities totalling ₹1.4b more than its cash and near-term receivables, combined.

Given Venky's (India) has a market capitalization of ₹14.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Venky's (India)'s profit, revenue, and operating cashflow have changed over the last few years.

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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