Does Vishwaraj Sugar Industries (NSE:VISHWARAJ) Have A Healthy Balance Sheet?

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 can see that Vishwaraj Sugar Industries Limited (NSE:VISHWARAJ) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Vishwaraj Sugar Industries's Debt?

As you can see below, Vishwaraj Sugar Industries had ₹3.25b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹163.9m in cash, and so its net debt is ₹3.09b.

How Healthy Is Vishwaraj Sugar Industries' Balance Sheet?

The latest balance sheet data shows that Vishwaraj Sugar Industries had liabilities of ₹3.43b due within a year, and liabilities of ₹2.20b falling due after that. Offsetting this, it had ₹163.9m in cash and ₹385.6m in receivables that were due within 12 months. So it has liabilities totalling ₹5.08b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.99b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Vishwaraj Sugar Industries would probably need a major re-capitalization if its creditors were to demand repayment.

Check out our latest analysis for Vishwaraj Sugar Industries

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.24 times and a disturbingly high net debt to EBITDA ratio of 12.6 hit our confidence in Vishwaraj Sugar Industries like a one-two punch to the gut. The debt burden here is substantial. Worse, Vishwaraj Sugar Industries's EBIT was down 79% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Vishwaraj Sugar 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 .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Vishwaraj Sugar Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Vishwaraj Sugar Industries's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its interest cover fails to inspire much confidence. It looks to us like Vishwaraj Sugar Industries carries a significant balance sheet burden. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Vishwaraj Sugar Industries (3 are potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.