Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Venky's (India) Limited (NSE:VENKEYS) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Venky's (India)
What Is Venky's (India)'s Debt?
As you can see below, Venky's (India) had ₹2.47b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹1.79b in cash, and so its net debt is ₹676.1m.
How Healthy Is Venky's (India)'s Balance Sheet?
We can see from the most recent balance sheet that Venky's (India) had liabilities of ₹6.20b falling due within a year, and liabilities of ₹520.4m due beyond that. Offsetting these obligations, it had cash of ₹1.79b as well as receivables valued at ₹3.88b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.05b.
Since publicly traded Venky's (India) shares are worth a total of ₹24.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Venky's (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Venky's (India) made a loss at the EBIT level, and saw its revenue drop to ₹28b, which is a fall of 17%. That's not what we would hope to see.
Caveat Emptor
While Venky's (India)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹252m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹193m. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Venky's (India)'s profit, revenue, and operating cashflow have changed over the last few years.
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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About NSEI:VENKEYS
Venky's (India)
Primarily engages in the production and sale of poultry products in India and internationally.
Flawless balance sheet, good value and pays a dividend.
