Here's Why VA Tech Wabag (NSE:WABAG) Can Manage Its Debt Responsibly

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.' 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 can see that VA Tech Wabag Limited (NSE:WABAG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

View our latest analysis for VA Tech Wabag

What Is VA Tech Wabag's Debt?

As you can see below, at the end of March 2024, VA Tech Wabag had ₹2.89b of debt, up from ₹2.19b a year ago. Click the image for more detail. But on the other hand it also has ₹5.06b in cash, leading to a ₹2.17b net cash position.

How Healthy Is VA Tech Wabag's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VA Tech Wabag had liabilities of ₹21.5b due within 12 months and liabilities of ₹5.96b due beyond that. Offsetting this, it had ₹5.06b in cash and ₹28.4b in receivables that were due within 12 months. So it can boast ₹5.98b more liquid assets than total liabilities.

This surplus suggests that VA Tech Wabag has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that VA Tech Wabag has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that VA Tech Wabag grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if VA Tech Wabag can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. VA Tech Wabag may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, VA Tech Wabag recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that VA Tech Wabag has net cash of ₹2.17b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't think VA Tech Wabag's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that VA Tech Wabag insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.