Is Vadivarhe Speciality Chemicals (NSE:VSCL) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Vadivarhe Speciality Chemicals Limited (NSE:VSCL) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vadivarhe Speciality Chemicals

How Much Debt Does Vadivarhe Speciality Chemicals Carry?

The image below, which you can click on for greater detail, shows that Vadivarhe Speciality Chemicals had debt of ₹198.2m at the end of March 2022, a reduction from ₹234.5m over a year. However, because it has a cash reserve of ₹8.02m, its net debt is less, at about ₹190.1m.

How Healthy Is Vadivarhe Speciality Chemicals' Balance Sheet?

The latest balance sheet data shows that Vadivarhe Speciality Chemicals had liabilities of ₹198.2m due within a year, and liabilities of ₹165.8m falling due after that. Offsetting these obligations, it had cash of ₹8.02m as well as receivables valued at ₹67.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹288.6m.

Given this deficit is actually higher than the company's market capitalization of ₹249.3m, we think shareholders really should watch Vadivarhe Speciality Chemicals's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Vadivarhe Speciality Chemicals's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Vadivarhe Speciality Chemicals made a loss at the EBIT level, and saw its revenue drop to ₹219m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did Vadivarhe Speciality Chemicals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹83m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹96m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Vadivarhe Speciality Chemicals (including 2 which are a bit unpleasant) .

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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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.