Venus Remedies (NSE:VENUSREM) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Venus Remedies Limited (NSE:VENUSREM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Venus Remedies

What Is Venus Remedies's Net Debt?

The chart below, which you can click on for greater detail, shows that Venus Remedies had ₹413.3m in debt in March 2024; about the same as the year before. However, it does have ₹871.9m in cash offsetting this, leading to net cash of ₹458.6m.

How Healthy Is Venus Remedies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Venus Remedies had liabilities of ₹794.2m due within 12 months and liabilities of ₹598.6m due beyond that. Offsetting this, it had ₹871.9m in cash and ₹1.10b in receivables that were due within 12 months. So it can boast ₹583.9m more liquid assets than total liabilities.

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

And we also note warmly that Venus Remedies grew its EBIT by 18% last year, making its debt load easier to handle. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Venus Remedies 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, Venus Remedies generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Venus Remedies has ₹458.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹238m, being 88% of its EBIT. So is Venus Remedies's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Venus Remedies that you should be aware of before investing here.

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.