Is Vadilal Industries (NSE:VADILALIND) A Risky Investment?

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.' 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 can see that Vadilal Industries Limited (NSE:VADILALIND) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vadilal Industries

How Much Debt Does Vadilal Industries Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Vadilal Industries had debt of ₹1.14b, up from ₹745.1m in one year. However, it also had ₹338.1m in cash, and so its net debt is ₹799.2m.

How Healthy Is Vadilal Industries's Balance Sheet?

We can see from the most recent balance sheet that Vadilal Industries had liabilities of ₹2.08b falling due within a year, and liabilities of ₹819.1m due beyond that. Offsetting these obligations, it had cash of ₹338.1m as well as receivables valued at ₹325.9m due within 12 months. So it has liabilities totalling ₹2.23b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Vadilal Industries is worth ₹5.53b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vadilal Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Vadilal Industries made a loss at the EBIT level, and saw its revenue drop to ₹4.0b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While Vadilal Industries'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 ₹211m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹439m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Vadilal Industries (of which 1 is potentially serious!) you should know about.

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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