Vaibhav Global (NSE:VAIBHAVGBL) 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. Importantly, Vaibhav Global Limited (NSE:VAIBHAVGBL) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vaibhav Global

How Much Debt Does Vaibhav Global Carry?

As you can see below, at the end of March 2022, Vaibhav Global had ₹1.65b of debt, up from ₹1.24b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.91b in cash, so it actually has ₹262.9m net cash.

How Healthy Is Vaibhav Global's Balance Sheet?

According to the last reported balance sheet, Vaibhav Global had liabilities of ₹5.05b due within 12 months, and liabilities of ₹572.9m due beyond 12 months. On the other hand, it had cash of ₹1.91b and ₹2.39b worth of receivables due within a year. So it has liabilities totalling ₹1.32b more than its cash and near-term receivables, combined.

Of course, Vaibhav Global has a market capitalization of ₹64.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Vaibhav Global boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Vaibhav Global's load is not too heavy, because its EBIT was down 51% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vaibhav Global's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. In the last three years, Vaibhav Global's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying 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 ₹262.9m. So we are not troubled with Vaibhav Global's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Vaibhav Global that you should be aware of.

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.