Vaibhav Global (NSE:VAIBHAVGBL) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Vaibhav Global Limited (NSE:VAIBHAVGBL) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

What Is Vaibhav Global's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Vaibhav Global had debt of ₹1.93b, up from ₹1.65b in one year. However, its balance sheet shows it holds ₹2.73b in cash, so it actually has ₹800.5m net cash.

How Strong Is Vaibhav Global's Balance Sheet?

We can see from the most recent balance sheet that Vaibhav Global had liabilities of ₹5.21b falling due within a year, and liabilities of ₹640.3m due beyond that. On the other hand, it had cash of ₹2.73b and ₹2.49b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹627.7m.

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 ₹63.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

It is just as well that Vaibhav Global's load is not too heavy, because its EBIT was down 25% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Vaibhav Global's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vaibhav Global has ₹800.5m in net cash. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Vaibhav Global is showing 1 warning sign in our investment analysis , you should know about...

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.