We Think Vera Synthetic (NSE:VERA) Can Stay On Top Of Its Debt
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. Importantly, Vera Synthetic Limited (NSE:VERA) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Vera Synthetic
What Is Vera Synthetic's Net Debt?
The image below, which you can click on for greater detail, shows that Vera Synthetic had debt of ₹17.6m at the end of March 2019, a reduction from ₹50.1m over a year. But on the other hand it also has ₹23.5m in cash, leading to a ₹5.87m net cash position.
A Look At Vera Synthetic's Liabilities
We can see from the most recent balance sheet that Vera Synthetic had liabilities of ₹26.5m falling due within a year, and liabilities of ₹14.2m due beyond that. On the other hand, it had cash of ₹23.5m and ₹76.4m worth of receivables due within a year. So it actually has ₹59.2m more liquid assets than total liabilities.
This surplus suggests that Vera Synthetic has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vera Synthetic boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Vera Synthetic grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vera Synthetic will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Vera Synthetic 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. Over the last three years, Vera Synthetic saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While it is always sensible to investigate a company's debt, in this case Vera Synthetic has ₹5.87m in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So we are not troubled with Vera Synthetic's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vera Synthetic's earnings per share history for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
