We Think Vidhi Specialty Food Ingredients (NSE:VIDHIING) Can Stay On Top Of Its 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. As with many other companies Vidhi Specialty Food Ingredients Limited (NSE:VIDHIING) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Vidhi Specialty Food Ingredients had ₹401.2m of debt in September 2023, down from ₹660.8m, one year before. On the flip side, it has ₹234.5m in cash leading to net debt of about ₹166.7m.

A Look At Vidhi Specialty Food Ingredients' Liabilities

Zooming in on the latest balance sheet data, we can see that Vidhi Specialty Food Ingredients had liabilities of ₹689.1m due within 12 months and liabilities of ₹61.2m due beyond that. Offsetting these obligations, it had cash of ₹234.5m as well as receivables valued at ₹986.1m due within 12 months. So it can boast ₹470.3m more liquid assets than total liabilities.

This state of affairs indicates that Vidhi Specialty Food Ingredients' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹23.7b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Vidhi Specialty Food Ingredients has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Vidhi Specialty Food Ingredients has a low net debt to EBITDA ratio of only 0.32. And its EBIT easily covers its interest expense, being 31.1 times the size. So we're pretty relaxed about its super-conservative use of debt. It is just as well that Vidhi Specialty Food Ingredients's load is not too heavy, because its EBIT was down 20% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vidhi Specialty Food Ingredients 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Vidhi Specialty Food Ingredients created free cash flow amounting to 7.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Based on what we've seen Vidhi Specialty Food Ingredients is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the factors mentioned above, we do feel a bit cautious about Vidhi Specialty Food Ingredients's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vidhi Specialty Food Ingredients's earnings per share history for free.

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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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.