Is V2 Retail (NSE:V2RETAIL) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that V2 Retail Limited (NSE:V2RETAIL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for V2 Retail

What Is V2 Retail's Debt?

You can click the graphic below for the historical numbers, but it shows that V2 Retail had ₹156.0m of debt in September 2020, down from ₹349.0m, one year before. However, it does have ₹39.5m in cash offsetting this, leading to net debt of about ₹116.6m.

How Healthy Is V2 Retail's Balance Sheet?

According to the last reported balance sheet, V2 Retail had liabilities of ₹1.07b due within 12 months, and liabilities of ₹2.52b due beyond 12 months. Offsetting this, it had ₹39.5m in cash and ₹16.3m in receivables that were due within 12 months. So its liabilities total ₹3.54b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹3.99b, so it does suggest shareholders should keep an eye on V2 Retail's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is V2 Retail'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.

Over 12 months, V2 Retail made a loss at the EBIT level, and saw its revenue drop to ₹4.7b, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

Not only did V2 Retail's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹110m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹97m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with V2 Retail (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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