Vedant Fashions (NSE:MANYAVAR) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Vedant Fashions Limited (NSE:MANYAVAR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Vedant Fashions

What Is Vedant Fashions's Net Debt?

As you can see below, at the end of September 2024, Vedant Fashions had ₹4.63b of debt, up from ₹3.65b a year ago. Click the image for more detail. But on the other hand it also has ₹7.14b in cash, leading to a ₹2.51b net cash position.

How Healthy Is Vedant Fashions' Balance Sheet?

The latest balance sheet data shows that Vedant Fashions had liabilities of ₹3.88b due within a year, and liabilities of ₹5.48b falling due after that. Offsetting this, it had ₹7.14b in cash and ₹6.11b in receivables that were due within 12 months. So it can boast ₹3.90b more liquid assets than total liabilities.

Having regard to Vedant Fashions' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹204.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Vedant Fashions has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Vedant Fashions saw its EBIT decline by 5.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Vedant Fashions 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, a company can only pay off debt with cold hard cash, not accounting profits. While Vedant Fashions 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, Vedant Fashions generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vedant Fashions has ₹2.51b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹4.6b, being 86% of its EBIT. So is Vedant Fashions's debt a risk? It doesn't seem so to us. 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 Vedant Fashions's earnings per share history for free.

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.