Is Venus Remedies (NSE:VENUSREM) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Venus Remedies Limited (NSE:VENUSREM) does carry debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Venus Remedies

What Is Venus Remedies's Debt?

You can click the graphic below for the historical numbers, but it shows that Venus Remedies had ₹428.5m of debt in March 2022, down from ₹513.2m, one year before. However, its balance sheet shows it holds ₹504.0m in cash, so it actually has ₹75.5m net cash.

A Look At Venus Remedies' Liabilities

We can see from the most recent balance sheet that Venus Remedies had liabilities of ₹927.4m falling due within a year, and liabilities of ₹466.3m due beyond that. On the other hand, it had cash of ₹504.0m and ₹671.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹218.7m.

Of course, Venus Remedies has a market capitalization of ₹2.71b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Venus Remedies boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Venus Remedies grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Venus Remedies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Venus Remedies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Venus Remedies's liabilities, but we can be reassured by the fact it has has net cash of ₹75.5m. The cherry on top was that in converted 289% of that EBIT to free cash flow, bringing in ₹273m. So we don't think Venus Remedies's use of debt is risky. 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. We've identified 4 warning signs with Venus Remedies , and understanding them should be part of your investment process.

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.