Varun Beverages (NSE:VBL) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Varun Beverages Limited (NSE:VBL) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Varun Beverages's Debt?

You can click the graphic below for the historical numbers, but it shows that Varun Beverages had ₹16.3b of debt in June 2025, down from ₹62.9b, one year before. But it also has ₹21.5b in cash to offset that, meaning it has ₹5.15b net cash.

How Healthy Is Varun Beverages' Balance Sheet?

We can see from the most recent balance sheet that Varun Beverages had liabilities of ₹44.6b falling due within a year, and liabilities of ₹17.5b due beyond that. Offsetting this, it had ₹21.5b in cash and ₹12.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹28.6b.

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 ₹1.70t 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

Also good is that Varun Beverages grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Varun Beverages's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Considering the last three years, Varun Beverages actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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 ₹5.15b. And it also grew its EBIT by 13% over the last year. So we don't have any problem with Varun Beverages's use of debt. 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 Varun Beverages's earnings per share history for free.

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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.