Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Veedol Corporation Limited (NSE:VEEDOL) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Veedol's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2025 Veedol had ₹219.6m of debt, an increase on ₹12.5m, over one year. However, its balance sheet shows it holds ₹1.38b in cash, so it actually has ₹1.16b net cash.
A Look At Veedol's Liabilities
Zooming in on the latest balance sheet data, we can see that Veedol had liabilities of ₹2.70b due within 12 months and liabilities of ₹686.3m due beyond that. On the other hand, it had cash of ₹1.38b and ₹2.93b worth of receivables due within a year. So it can boast ₹923.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Veedol could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Veedol has more cash than debt is arguably a good indication that it can manage its debt safely.
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Also good is that Veedol grew its EBIT at 16% 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 Veedol'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Veedol 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. Looking at the most recent three years, Veedol recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Veedol has ₹1.16b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 16% over the last year. So is Veedol's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Veedol that you should be aware of before investing here.
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.