Is Vivimed Labs (NSE:VIVIMEDLAB) 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.' 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 Vivimed Labs Limited (NSE:VIVIMEDLAB) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vivimed Labs

What Is Vivimed Labs's Net Debt?

As you can see below, at the end of September 2020, Vivimed Labs had ₹10.3b of debt, up from ₹8.28b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹504.9m, its net debt is less, at about ₹9.76b.

How Strong Is Vivimed Labs's Balance Sheet?

According to the last reported balance sheet, Vivimed Labs had liabilities of ₹8.39b due within 12 months, and liabilities of ₹6.21b due beyond 12 months. Offsetting this, it had ₹504.9m in cash and ₹3.29b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.8b.

This deficit casts a shadow over the ₹1.50b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Vivimed Labs would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Vivimed 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.

In the last year Vivimed Labs had a loss before interest and tax, and actually shrunk its revenue by 20%, to ₹9.9b. We would much prefer see growth.

Caveat Emptor

While Vivimed Labs's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹273m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 ₹937m in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Vivimed Labs (2 are potentially serious) you should be aware of.

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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