Is Vaishali Pharma (NSE:VAISHALI) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Vaishali Pharma Limited (NSE:VAISHALI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Vaishali Pharma

What Is Vaishali Pharma's Debt?

You can click the graphic below for the historical numbers, but it shows that Vaishali Pharma had ₹131.2m of debt in September 2024, down from ₹150.5m, one year before. However, it does have ₹11.4m in cash offsetting this, leading to net debt of about ₹119.7m.

How Strong Is Vaishali Pharma's Balance Sheet?

We can see from the most recent balance sheet that Vaishali Pharma had liabilities of ₹329.7m falling due within a year, and liabilities of ₹32.2m due beyond that. Offsetting this, it had ₹11.4m in cash and ₹432.8m in receivables that were due within 12 months. So it can boast ₹82.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Vaishali Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vaishali Pharma'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, Vaishali Pharma reported revenue of ₹992m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Vaishali Pharma's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹6.2m 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 we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. To that end, you should be aware of the 2 warning signs we've spotted with Vaishali Pharma .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.