Vimta Labs (NSE:VIMTALABS) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Vimta Labs Limited (NSE:VIMTALABS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. 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 Vimta Labs

What Is Vimta Labs's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Vimta Labs had debt of ₹191.9m, up from ₹149.9m in one year. However, it does have ₹257.9m in cash offsetting this, leading to net cash of ₹66.0m.

A Look At Vimta Labs' Liabilities

Zooming in on the latest balance sheet data, we can see that Vimta Labs had liabilities of ₹540.7m due within 12 months and liabilities of ₹262.8m due beyond that. On the other hand, it had cash of ₹257.9m and ₹870.8m worth of receivables due within a year. So it can boast ₹325.1m more liquid assets than total liabilities.

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

But the bad news is that Vimta Labs has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vimta Labs'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vimta Labs 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. Looking at the most recent three years, Vimta Labs recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vimta Labs has ₹66.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Vimta Labs's use of debt. 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. For example - Vimta Labs has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.