We Think V-Guard Industries (NSE:VGUARD) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, V-Guard Industries Limited (NSE:VGUARD) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for V-Guard Industries

How Much Debt Does V-Guard Industries Carry?

You can click the graphic below for the historical numbers, but it shows that V-Guard Industries had ₹1.47b of debt in September 2024, down from ₹2.93b, one year before. But it also has ₹1.51b in cash to offset that, meaning it has ₹42.6m net cash.

How Healthy Is V-Guard Industries' Balance Sheet?

According to the last reported balance sheet, V-Guard Industries had liabilities of ₹10.8b due within 12 months, and liabilities of ₹2.30b due beyond 12 months. Offsetting this, it had ₹1.51b in cash and ₹4.62b in receivables that were due within 12 months. So its liabilities total ₹6.95b more than the combination of its cash and short-term receivables.

Given V-Guard Industries has a market capitalization of ₹179.5b, 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. While it does have liabilities worth noting, V-Guard Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that V-Guard Industries has boosted its EBIT by 44%, 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 V-Guard Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While V-Guard Industries 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. During the last three years, V-Guard Industries produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that V-Guard Industries has ₹42.6m in net cash. And we liked the look of last year's 44% year-on-year EBIT growth. So we don't think V-Guard Industries's use of debt is risky. 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 example - V-Guard Industries has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.