We Think Vaibhav Global (NSE:VAIBHAVGBL) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Vaibhav Global Limited (NSE:VAIBHAVGBL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Vaibhav Global

How Much Debt Does Vaibhav Global Carry?

As you can see below, at the end of September 2022, Vaibhav Global had ₹1.66b of debt, up from ₹1.54b a year ago. Click the image for more detail. But it also has ₹2.13b in cash to offset that, meaning it has ₹467.7m net cash.

How Healthy Is Vaibhav Global's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vaibhav Global had liabilities of ₹5.10b due within 12 months and liabilities of ₹538.0m due beyond that. Offsetting these obligations, it had cash of ₹2.13b as well as receivables valued at ₹2.50b due within 12 months. So its liabilities total ₹1.01b more than the combination of its cash and short-term receivables.

Having regard to Vaibhav Global's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹52.4b company is short on cash, but still worth keeping an eye on the 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.

The modesty of its debt load may become crucial for Vaibhav Global if management cannot prevent a repeat of the 53% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Vaibhav Global reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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 ₹467.7m. So we are not troubled with Vaibhav Global's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Vaibhav Global (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.