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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that VL E-Governance & IT Solutions Limited (NSE:VLEGOV) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

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

What Is VL E-Governance & IT Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that VL E-Governance & IT Solutions had debt of ₹510.9m at the end of September 2024, a reduction from ₹538.9m over a year. However, because it has a cash reserve of ₹10.4m, its net debt is less, at about ₹500.5m.

A Look At VL E-Governance & IT Solutions' Liabilities

According to the balance sheet data, VL E-Governance & IT Solutions had liabilities of ₹699.9m due within 12 months, but no longer term liabilities. Offsetting this, it had ₹10.4m in cash and ₹11.6b in receivables that were due within 12 months. So it actually has ₹10.9b more liquid assets than total liabilities.

This luscious liquidity implies that VL E-Governance & IT Solutions' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since VL E-Governance & IT Solutions 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 VL E-Governance & IT Solutions had a loss before interest and tax, and actually shrunk its revenue by 97%, to ₹105m. That makes us nervous, to say the least.

Caveat Emptor

While VL E-Governance & IT Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹10m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for VL E-Governance & IT Solutions (1 is a bit concerning) 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.