Is Vaibhav Global (NSE:VAIBHAVGBL) Using Too Much 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.' 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. As with many other companies Vaibhav Global Limited (NSE:VAIBHAVGBL) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vaibhav Global

How Much Debt Does Vaibhav Global Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Vaibhav Global had ₹1.54b of debt, an increase on ₹1.14b, over one year. However, its balance sheet shows it holds ₹4.21b in cash, so it actually has ₹2.67b net cash.

A Look At Vaibhav Global's Liabilities

We can see from the most recent balance sheet that Vaibhav Global had liabilities of ₹5.08b falling due within a year, and liabilities of ₹624.1m due beyond that. Offsetting this, it had ₹4.21b in cash and ₹1.82b in receivables that were due within 12 months. So it actually has ₹330.6m more liquid assets than total liabilities.

This state of affairs indicates that Vaibhav Global's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹59.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Vaibhav Global boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Vaibhav Global's EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vaibhav Global 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vaibhav Global 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, Vaibhav Global produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Vaibhav Global has ₹2.67b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹1.6b, being 69% of its EBIT. So we don't have any problem with Vaibhav Global's use of debt. 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. Case in point: We've spotted 2 warning signs for Vaibhav Global you should be aware of.

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.