Here's Why Varun Beverages (NSE:VBL) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Varun Beverages Limited (NSE:VBL) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

How Much Debt Does Varun Beverages Carry?

The image below, which you can click on for greater detail, shows that Varun Beverages had debt of ₹23.6b at the end of December 2024, a reduction from ₹51.9b over a year. But it also has ₹24.5b in cash to offset that, meaning it has ₹856.6m net cash.

How Healthy Is Varun Beverages' Balance Sheet?

According to the last reported balance sheet, Varun Beverages had liabilities of ₹45.2b due within 12 months, and liabilities of ₹18.8b due beyond 12 months. Offsetting these obligations, it had cash of ₹24.5b as well as receivables valued at ₹16.5b due within 12 months. So its liabilities total ₹23.0b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Varun Beverages' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹1.82t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Varun Beverages also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Varun Beverages

Another good sign is that Varun Beverages has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Varun Beverages can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Varun Beverages 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. Over the last three years, Varun Beverages recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Varun Beverages's liabilities, but we can be reassured by the fact it has has net cash of ₹856.6m. And we liked the look of last year's 28% year-on-year EBIT growth. So we are not troubled with Varun Beverages's debt use. 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. Be aware that Varun Beverages is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.