Does VA Tech Wabag (NSE:WABAG) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that VA Tech Wabag Limited (NSE:WABAG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for VA Tech Wabag

How Much Debt Does VA Tech Wabag Carry?

You can click the graphic below for the historical numbers, but it shows that VA Tech Wabag had ₹2.78b of debt in September 2023, down from ₹3.77b, one year before. However, it does have ₹3.37b in cash offsetting this, leading to net cash of ₹591.0m.

How Healthy Is VA Tech Wabag's Balance Sheet?

According to the last reported balance sheet, VA Tech Wabag had liabilities of ₹19.5b due within 12 months, and liabilities of ₹4.97b due beyond 12 months. Offsetting these obligations, it had cash of ₹3.37b as well as receivables valued at ₹16.6b due within 12 months. So its liabilities total ₹4.49b more than the combination of its cash and short-term receivables.

Given VA Tech Wabag has a market capitalization of ₹41.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, VA Tech Wabag boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, VA Tech Wabag grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine VA Tech Wabag's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While VA Tech Wabag 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. In the last three years, VA Tech Wabag's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although VA Tech Wabag's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹591.0m. And we liked the look of last year's 66% year-on-year EBIT growth. So we don't think VA Tech Wabag's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for VA Tech Wabag you should know about.

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. 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.