Is VA Tech Wabag (NSE:WABAG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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. When we think about a company's use of debt, we first look at cash and debt together.

What Is VA Tech Wabag's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2025 VA Tech Wabag had debt of ₹3.57b, up from ₹2.81b in one year. However, it does have ₹9.45b in cash offsetting this, leading to net cash of ₹5.87b.

How Healthy Is VA Tech Wabag's Balance Sheet?

We can see from the most recent balance sheet that VA Tech Wabag had liabilities of ₹25.2b falling due within a year, and liabilities of ₹6.01b due beyond that. Offsetting these obligations, it had cash of ₹9.45b as well as receivables valued at ₹20.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.53b.

This state of affairs indicates that VA Tech Wabag's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹92.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, VA Tech Wabag also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for VA Tech Wabag

One way VA Tech Wabag could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 13%, as it did over the last year. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, VA Tech Wabag produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that VA Tech Wabag has ₹5.87b in net cash. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't think VA Tech Wabag's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that VA Tech Wabag is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.