Does Vardhman Textiles (NSE:VTL) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Vardhman Textiles Limited (NSE:VTL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vardhman Textiles

How Much Debt Does Vardhman Textiles Carry?

The image below, which you can click on for greater detail, shows that Vardhman Textiles had debt of ₹9.51b at the end of September 2024, a reduction from ₹15.1b over a year. But it also has ₹13.5b in cash to offset that, meaning it has ₹3.95b net cash.

How Healthy Is Vardhman Textiles' Balance Sheet?

According to the last reported balance sheet, Vardhman Textiles had liabilities of ₹14.5b due within 12 months, and liabilities of ₹6.94b due beyond 12 months. Offsetting this, it had ₹13.5b in cash and ₹12.3b in receivables that were due within 12 months. So it can boast ₹4.34b more liquid assets than total liabilities.

This short term liquidity is a sign that Vardhman Textiles could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vardhman Textiles boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Vardhman Textiles grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. 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 Vardhman Textiles 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vardhman Textiles 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. Looking at the most recent three years, Vardhman Textiles recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vardhman Textiles has ₹3.95b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 75% over the last year. So is Vardhman Textiles's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Vardhman Textiles that you should be aware of.

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. 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.