These 4 Measures Indicate That Vaibhav Global (NSE:VAIBHAVGBL) Is Using Debt Safely

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.' 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 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 March 2021 Vaibhav Global had ₹917.2m of debt, an increase on ₹644.3m, over one year. However, it does have ₹4.68b in cash offsetting this, leading to net cash of ₹3.77b.

How Strong Is Vaibhav Global's Balance Sheet?

We can see from the most recent balance sheet that Vaibhav Global had liabilities of ₹4.08b falling due within a year, and liabilities of ₹235.6m due beyond that. Offsetting this, it had ₹4.68b in cash and ₹1.70b in receivables that were due within 12 months. So it can boast ₹2.07b more liquid assets than total liabilities.

Having regard to Vaibhav Global's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹134.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Vaibhav Global has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Vaibhav Global grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Vaibhav Global generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Vaibhav Global has ₹3.77b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.7b, being 82% of its EBIT. So we don't think Vaibhav Global's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Vaibhav Global that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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