Vadilal Industries (NSE:VADILALIND) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Vadilal Industries Limited (NSE:VADILALIND) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for Vadilal Industries

What Is Vadilal Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Vadilal Industries had ₹1.28b of debt, an increase on ₹745.1m, over one year. However, it also had ₹338.1m in cash, and so its net debt is ₹946.1m.

A Look At Vadilal Industries' Liabilities

According to the last reported balance sheet, Vadilal Industries had liabilities of ₹2.08b due within 12 months, and liabilities of ₹819.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹338.1m as well as receivables valued at ₹325.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.23b.

While this might seem like a lot, it is not so bad since Vadilal Industries has a market capitalization of ₹6.39b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Vadilal Industries had a loss before interest and tax, and actually shrunk its revenue by 35%, to ₹4.0b. To be frank that doesn't bode well.

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 ₹141m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Vadilal Industries (2 are a bit unpleasant) you should be aware of.

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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