We Think Vilas Transcore (NSE:VILAS) Can Stay On Top Of Its 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 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. Importantly, Vilas Transcore Limited (NSE:VILAS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 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 Vilas Transcore

What Is Vilas Transcore's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Vilas Transcore had ₹151.3m of debt, an increase on ₹478.0k, over one year. However, it does have ₹1.57b in cash offsetting this, leading to net cash of ₹1.42b.

How Healthy Is Vilas Transcore's Balance Sheet?

We can see from the most recent balance sheet that Vilas Transcore had liabilities of ₹724.9m falling due within a year, and liabilities of ₹29.8m due beyond that. Offsetting these obligations, it had cash of ₹1.57b as well as receivables valued at ₹815.0m due within 12 months. So it can boast ₹1.63b more liquid assets than total liabilities.

It's good to see that Vilas Transcore has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Vilas Transcore has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Vilas Transcore grew its EBIT at 10% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vilas Transcore 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vilas Transcore may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Vilas Transcore reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vilas Transcore has ₹1.42b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 10% over the last year. So we don't have any problem with Vilas Transcore's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Vilas Transcore .

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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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.