Is Vidhi Specialty Food Ingredients (NSE:VIDHIING) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Vidhi Specialty Food Ingredients Limited (NSE:VIDHIING) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Vidhi Specialty Food Ingredients

What Is Vidhi Specialty Food Ingredients's Debt?

You can click the graphic below for the historical numbers, but it shows that Vidhi Specialty Food Ingredients had ₹300.1m of debt in March 2021, down from ₹341.1m, one year before. On the flip side, it has ₹197.9m in cash leading to net debt of about ₹102.2m.

A Look At Vidhi Specialty Food Ingredients' Liabilities

We can see from the most recent balance sheet that Vidhi Specialty Food Ingredients had liabilities of ₹600.0m falling due within a year, and liabilities of ₹42.6m due beyond that. On the other hand, it had cash of ₹197.9m and ₹953.8m worth of receivables due within a year. So it actually has ₹509.2m more liquid assets than total liabilities.

This surplus suggests that Vidhi Specialty Food Ingredients has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Vidhi Specialty Food Ingredients has a very light debt load indeed.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Vidhi Specialty Food Ingredients's net debt is only 0.19 times its EBITDA. And its EBIT easily covers its interest expense, being 31.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, Vidhi Specialty Food Ingredients grew its EBIT by 4.4% in the last year, making that debt load look even more manageable. 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 Vidhi Specialty Food Ingredients will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Vidhi Specialty Food Ingredients's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Vidhi Specialty Food Ingredients's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. When we consider the range of factors above, it looks like Vidhi Specialty Food Ingredients is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Vidhi Specialty Food Ingredients that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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