Would VIP Clothing (NSE:VIPCLOTHNG) Be Better Off With Less Debt?

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, VIP Clothing Limited (NSE:VIPCLOTHNG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for VIP Clothing

What Is VIP Clothing's Debt?

The image below, which you can click on for greater detail, shows that VIP Clothing had debt of ₹705.4m at the end of September 2020, a reduction from ₹887.1m over a year. However, because it has a cash reserve of ₹44.8m, its net debt is less, at about ₹660.5m.

How Healthy Is VIP Clothing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VIP Clothing had liabilities of ₹998.6m due within 12 months and liabilities of ₹296.6m due beyond that. On the other hand, it had cash of ₹44.8m and ₹600.6m worth of receivables due within a year. So it has liabilities totalling ₹649.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹842.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is VIP Clothing's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, VIP Clothing made a loss at the EBIT level, and saw its revenue drop to ₹1.3b, which is a fall of 36%. To be frank that doesn't bode well.

Caveat Emptor

While VIP Clothing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹158m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹305m. In the meantime, we consider the stock very risky. 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 3 warning signs we've spotted with VIP Clothing (including 1 which is shouldn't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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