Is Vadilal Industries (NSE:VADILALIND) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Vadilal Industries Limited (NSE:VADILALIND) 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?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vadilal Industries

What Is Vadilal Industries's Debt?

As you can see below, Vadilal Industries had ₹529.5m of debt at September 2024, down from ₹933.2m a year prior. However, it does have ₹1.78b in cash offsetting this, leading to net cash of ₹1.25b.

A Look At Vadilal Industries' Liabilities

We can see from the most recent balance sheet that Vadilal Industries had liabilities of ₹1.60b falling due within a year, and liabilities of ₹1.49b due beyond that. Offsetting this, it had ₹1.78b in cash and ₹1.05b in receivables that were due within 12 months. So it has liabilities totalling ₹256.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that Vadilal Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹30.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Vadilal Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Vadilal Industries grew its EBIT by 9.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Vadilal Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Vadilal Industries produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vadilal Industries has ₹1.25b in net cash. On top of that, it increased its EBIT by 9.5% in the last twelve months. So is Vadilal Industries's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vadilal Industries's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.