David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Vikas Multicorp Limited (NSE:VIKASMCORP) makes use of debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Vikas Multicorp
What Is Vikas Multicorp's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Vikas Multicorp had debt of ₹392.4m, up from ₹200.3m in one year. However, it does have ₹61.0m in cash offsetting this, leading to net debt of about ₹331.3m.
How Strong Is Vikas Multicorp's Balance Sheet?
According to the last reported balance sheet, Vikas Multicorp had liabilities of ₹1.46b due within 12 months, and liabilities of ₹83.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹61.0m as well as receivables valued at ₹1.44b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹45.6m.
Given Vikas Multicorp has a market capitalization of ₹1.86b, 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.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Weak interest cover of 0.98 times and a disturbingly high net debt to EBITDA ratio of 6.1 hit our confidence in Vikas Multicorp like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Vikas Multicorp's EBIT was down 32% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vikas Multicorp will need earnings to service that debt. 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.