Would VL E-Governance & IT Solutions (NSE:VLEGOV) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies VL E-Governance & IT Solutions Limited (NSE:VLEGOV) makes use of debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for VL E-Governance & IT Solutions

How Much Debt Does VL E-Governance & IT Solutions Carry?

You can click the graphic below for the historical numbers, but it shows that VL E-Governance & IT Solutions had ₹510.9m of debt in March 2024, down from ₹536.7m, one year before. And it doesn't have much cash, so its net debt is about the same.

How Strong Is VL E-Governance & IT Solutions' Balance Sheet?

According to the balance sheet data, VL E-Governance & IT Solutions had liabilities of ₹687.3m due within 12 months, but no longer term liabilities. Offsetting this, it had ₹682.0k in cash and ₹11.6b in receivables that were due within 12 months. So it can boast ₹10.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that VL E-Governance & IT Solutions' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since VL E-Governance & IT Solutions 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.

Over 12 months, VL E-Governance & IT Solutions made a loss at the EBIT level, and saw its revenue drop to ₹220m, which is a fall of 97%. That makes us nervous, to say the least.

Caveat Emptor

Not only did VL E-Governance & IT Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹81m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. For example VL E-Governance & IT Solutions has 4 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.