Does Vipul (NSE:VIPULLTD) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Vipul Limited (NSE:VIPULLTD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Vipul

What Is Vipul's Debt?

As you can see below, Vipul had ₹1.62b of debt at September 2021, down from ₹3.83b a year prior. However, it does have ₹603.7m in cash offsetting this, leading to net debt of about ₹1.01b.

How Strong Is Vipul's Balance Sheet?

We can see from the most recent balance sheet that Vipul had liabilities of ₹15.3b falling due within a year, and liabilities of ₹872.6m due beyond that. Offsetting this, it had ₹603.7m in cash and ₹3.08b in receivables that were due within 12 months. So it has liabilities totalling ₹12.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹3.17b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Vipul would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vipul'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.

Over 12 months, Vipul made a loss at the EBIT level, and saw its revenue drop to ₹537m, which is a fall of 20%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Vipul's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹571m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹563m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Be aware that Vipul is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.