Is Vesuvius India (NSE:VESUVIUS) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Vesuvius India Limited (NSE:VESUVIUS) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vesuvius India

How Much Debt Does Vesuvius India Carry?

As you can see below, at the end of June 2024, Vesuvius India had ₹136.1m of debt, up from none a year ago. Click the image for more detail. But it also has ₹4.23b in cash to offset that, meaning it has ₹4.09b net cash.

How Healthy Is Vesuvius India's Balance Sheet?

The latest balance sheet data shows that Vesuvius India had liabilities of ₹3.59b due within a year, and liabilities of ₹405.9m falling due after that. On the other hand, it had cash of ₹4.23b and ₹3.99b worth of receivables due within a year. So it actually has ₹4.23b more liquid assets than total liabilities.

This surplus suggests that Vesuvius India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vesuvius India boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Vesuvius India has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vesuvius India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vesuvius India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Vesuvius India actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vesuvius India has ₹4.09b in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't have any problem with Vesuvius India's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vesuvius India's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.