Is Vaibhav Global (NSE:VAIBHAVGBL) Using Too Much Debt?

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 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. We can see that Vaibhav Global Limited (NSE:VAIBHAVGBL) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vaibhav Global

What Is Vaibhav Global's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Vaibhav Global had debt of ₹1.24b, up from ₹1.03b in one year. However, it does have ₹1.50b in cash offsetting this, leading to net cash of ₹258.9m.

How Healthy Is Vaibhav Global's Balance Sheet?

The latest balance sheet data shows that Vaibhav Global had liabilities of ₹5.18b due within a year, and liabilities of ₹798.6m falling due after that. Offsetting these obligations, it had cash of ₹1.50b as well as receivables valued at ₹2.64b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.85b.

Since publicly traded Vaibhav Global shares are worth a total of ₹66.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Vaibhav Global also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Vaibhav Global's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Vaibhav Global's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Vaibhav Global 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. In the last three years, Vaibhav Global created free cash flow amounting to 20% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Vaibhav Global's liabilities, but we can be reassured by the fact it has has net cash of ₹258.9m. So we are not troubled with Vaibhav Global's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Vaibhav Global (including 1 which doesn't sit too well with us) .

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.