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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for VIP Clothing

What Is VIP Clothing's Net 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 ₹44.7m, its net debt is less, at about ₹660.6m.

How Strong Is VIP Clothing's Balance Sheet?

We can see from the most recent balance sheet that VIP Clothing had liabilities of ₹998.6m falling due within a year, and liabilities of ₹296.6m due beyond that. Offsetting this, it had ₹44.7m in cash and ₹597.9m in receivables that were due within 12 months. So it has liabilities totalling ₹652.6m more than its cash and near-term receivables, combined.

VIP Clothing has a market capitalization of ₹1.17b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year VIP Clothing had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₹1.3b. To be frank that doesn't bode well.

Caveat Emptor

Not only did VIP Clothing's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹50m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₹139m into a profit. In the meantime, we consider the stock very risky. 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 3 warning signs for VIP Clothing (1 is significant) 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. 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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