The size of Vedanta Limited (NSE:VEDL), a ₹885.97b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. Today we will look at Vedanta’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into VEDL here. Check out our latest analysis for Vedanta
Does VEDL produce enough cash relative to debt?
Over the past year, VEDL has reduced its debt from ₹715.69b to ₹487.40b , which comprises of short- and long-term debt. With this debt payback, VEDL’s cash and short-term investments stands at ₹351.09b for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of VEDL’s operating efficiency ratios such as ROA here.
Can VEDL pay its short-term liabilities?
At the current liabilities level of ₹672.47b liabilities, the company is not able to meet these obligations given the level of current assets of ₹551.14b, with a current ratio of 0.82x below the prudent level of 3x.
Does VEDL face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 61.33%, VEDL can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether VEDL is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For VEDL, the ratio of 3.26x suggests that interest is well-covered. Large-cap investments like VEDL are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
VEDL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how VEDL has been performing in the past. I suggest you continue to research Vedanta to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VEDL’s future growth? Take a look at our free research report of analyst consensus for VEDL’s outlook.
- Valuation: What is VEDL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether VEDL is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.