We Think Vikas WSP (NSE:VIKASWSP) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Vikas WSP Limited (NSE:VIKASWSP) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vikas WSP

What Is Vikas WSP's Debt?

As you can see below, Vikas WSP had ₹1.06b of debt at March 2021, down from ₹1.36b a year prior. And it doesn't have much cash, so its net debt is about the same.

A Look At Vikas WSP's Liabilities

Zooming in on the latest balance sheet data, we can see that Vikas WSP had liabilities of ₹5.45b due within 12 months and liabilities of ₹34.6m due beyond that. On the other hand, it had cash of ₹12.4m and ₹5.75b worth of receivables due within a year. So it can boast ₹276.3m more liquid assets than total liabilities.

This surplus suggests that Vikas WSP is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vikas WSP 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.

In the last year Vikas WSP had a loss before interest and tax, and actually shrunk its revenue by 71%, to ₹2.2b. That makes us nervous, to say the least.

Caveat Emptor

While Vikas WSP's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹774m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Vikas WSP you should know about.

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.
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