Is Global Vectra Helicorp (NSE:GLOBALVECT) A Risky Investment?

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.' 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. We can see that Global Vectra Helicorp Limited (NSE:GLOBALVECT) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Global Vectra Helicorp

How Much Debt Does Global Vectra Helicorp Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Global Vectra Helicorp had ₹5.04b of debt, an increase on ₹3.92b, over one year. However, because it has a cash reserve of ₹308.6m, its net debt is less, at about ₹4.73b.

How Strong Is Global Vectra Helicorp's Balance Sheet?

The latest balance sheet data shows that Global Vectra Helicorp had liabilities of ₹4.63b due within a year, and liabilities of ₹3.83b falling due after that. On the other hand, it had cash of ₹308.6m and ₹1.02b worth of receivables due within a year. So its liabilities total ₹7.12b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹1.68b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Global Vectra Helicorp would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.47 times and a disturbingly high net debt to EBITDA ratio of 16.8 hit our confidence in Global Vectra Helicorp like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, the silver lining was that Global Vectra Helicorp achieved a positive EBIT of ₹96m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Global Vectra Helicorp will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Global Vectra Helicorp actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

On the face of it, Global Vectra Helicorp's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Overall, it seems to us that Global Vectra Helicorp's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Global Vectra Helicorp (of which 1 is concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.