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. 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 Venus Remedies Limited (NSE:VENUSREM) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Venus Remedies's Debt?
You can click the graphic below for the historical numbers, but it shows that Venus Remedies had ₹1.88b of debt in September 2019, down from ₹2.98b, one year before. However, it also had ₹147.2m in cash, and so its net debt is ₹1.73b.
How Healthy Is Venus Remedies's Balance Sheet?
The latest balance sheet data shows that Venus Remedies had liabilities of ₹2.59b due within a year, and liabilities of ₹1.18b falling due after that. Offsetting these obligations, it had cash of ₹147.2m as well as receivables valued at ₹598.3m due within 12 months. So it has liabilities totalling ₹3.03b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹277.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, Venus Remedies would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Venus Remedies'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, Venus Remedies made a loss at the EBIT level, and saw its revenue drop to ₹3.3b, which is a fall of 5.5%. We would much prefer see growth.
Importantly, Venus Remedies had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable ₹48m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹269m in the last year. So we're about as excited about owning this stock as hiking up a snowy mountain with wet socks on in the rain. It's too risky for us. For riskier companies like Venus Remedies I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.