Is Global Vectra Helicorp (NSE:GLOBALVECT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Global Vectra Helicorp Limited (NSE:GLOBALVECT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Global Vectra Helicorp

What Is Global Vectra Helicorp's Debt?

The image below, which you can click on for greater detail, shows that Global Vectra Helicorp had debt of ₹386.2m at the end of September 2024, a reduction from ₹449.9m over a year. However, it also had ₹189.3m in cash, and so its net debt is ₹196.9m.

How Healthy Is Global Vectra Helicorp's Balance Sheet?

We can see from the most recent balance sheet that Global Vectra Helicorp had liabilities of ₹4.78b falling due within a year, and liabilities of ₹3.77b due beyond that. On the other hand, it had cash of ₹189.3m and ₹693.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.67b.

The deficiency here weighs heavily on the ₹4.60b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

Given net debt is only 0.51 times EBITDA, it is initially surprising to see that Global Vectra Helicorp's EBIT has low interest coverage of 0.93 times. So one way or the other, it's clear the debt levels are not trivial. We also note that Global Vectra Helicorp improved its EBIT from a last year's loss to a positive ₹213m. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Global Vectra Helicorp actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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. Once we consider all the factors above, together, it seems to us that Global Vectra Helicorp's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. To that end, you should learn about the 2 warning signs we've spotted with Global Vectra Helicorp (including 1 which doesn't sit too well with us) .

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.