Here's Why Vital Chemtech (NSE:VITAL) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Vital Chemtech Limited (NSE:VITAL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vital Chemtech

What Is Vital Chemtech's Debt?

You can click the graphic below for the historical numbers, but it shows that Vital Chemtech had ₹223.2m of debt in September 2023, down from ₹356.2m, one year before. But it also has ₹315.2m in cash to offset that, meaning it has ₹92.0m net cash.

How Healthy Is Vital Chemtech's Balance Sheet?

We can see from the most recent balance sheet that Vital Chemtech had liabilities of ₹230.3m falling due within a year, and liabilities of ₹197.5m due beyond that. Offsetting this, it had ₹315.2m in cash and ₹367.0m in receivables that were due within 12 months. So it can boast ₹254.4m more liquid assets than total liabilities.

This surplus suggests that Vital Chemtech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vital Chemtech boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Vital Chemtech's saving grace is its low debt levels, because its EBIT has tanked 77% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vital Chemtech 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, a company can only pay off debt with cold hard cash, not accounting profits. While Vital Chemtech has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Vital Chemtech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vital Chemtech has net cash of ₹92.0m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Vital Chemtech's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Vital Chemtech you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.