Is Global Vectra Helicorp (NSE:GLOBALVECT) Using Too Much 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Global Vectra Helicorp Limited (NSE:GLOBALVECT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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 Global Vectra Helicorp had ₹584.2m of debt in September 2020, down from ₹1.19b, one year before. However, it does have ₹492.6m in cash offsetting this, leading to net debt of about ₹91.6m.

A Look At Global Vectra Helicorp's Liabilities

According to the last reported balance sheet, Global Vectra Helicorp had liabilities of ₹4.00b due within 12 months, and liabilities of ₹2.62b due beyond 12 months. Offsetting this, it had ₹492.6m in cash and ₹685.6m in receivables that were due within 12 months. So its liabilities total ₹5.44b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹649.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Global Vectra Helicorp would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Global Vectra Helicorp's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Global Vectra Helicorp had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₹3.5b. To be frank that doesn't bode well.

Caveat Emptor

While Global Vectra Helicorp'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 ₹421m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹225m in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Global Vectra Helicorp (including 2 which can'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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