David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Industries Limited (NSE:VIPIND) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for VIP Industries
What Is VIP Industries's Net Debt?
You can click the graphic below for the historical numbers, but it shows that VIP Industries had ₹707.0m of debt in September 2021, down from ₹2.04b, one year before. But it also has ₹1.06b in cash to offset that, meaning it has ₹349.2m net cash.
How Healthy Is VIP Industries' Balance Sheet?
According to the last reported balance sheet, VIP Industries had liabilities of ₹3.52b due within 12 months, and liabilities of ₹1.64b due beyond 12 months. On the other hand, it had cash of ₹1.06b and ₹2.61b worth of receivables due within a year. So its liabilities total ₹1.50b more than the combination of its cash and short-term receivables.
This state of affairs indicates that VIP Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹84.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, VIP Industries also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if VIP Industries 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.
Over 12 months, VIP Industries reported revenue of ₹10b, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is VIP Industries?
Although VIP Industries had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹103m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example - VIP Industries has 1 warning sign we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About NSEI:VIPIND
V.I.P. Industries
Manufactures and sells luggage, backpacks, and accessories in India.
High growth potential with imperfect balance sheet.
