V-Guard Industries (NSE: VGUARD) has a fairly healthy track record
Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that V-Guard Industries Limited (NSE: VGUARD) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for V-Guard Industries
What is the debt of V-Guard Industries?
The graph below, which you can click for more details, shows that V-Guard Industries had 130.1 million yen in debt as of March 2021; about the same as the year before. But on the other hand, it also has 2.81 billion yen in cash, which leads to a net cash position of 2.68 billion yen.
How healthy is V-Guard Industries’ balance sheet?
According to the latest published balance sheet, V-Guard Industries had liabilities of 5.93 billion yen due within 12 months and liabilities of 662.5 million yen due beyond 12 months. In return, he had 2.81 billion yen in cash and 3.90 billion yen in receivables due within 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.
Considering the size of V-Guard Industries, it appears that its liquid assets are well balanced with its total liabilities. So the 107.4 billion yen company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Put simply, the fact that V-Guard Industries has more cash than debt is arguably a good indication that it can safely manage its debt.
Another good thing is that V-Guard Industries has increased its EBIT to 17% over the past year, further increasing its ability to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether V-Guard Industries can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. Although V-Guard Industries has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it is. this cash balance is built (or eroded). Over the past three years, V-Guard Industries’ free cash flow has been 44% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
While we agree with investors who find the debt of concern, you should keep in mind that V-Guard Industries has net cash of 2.68 billion yen, as well as more liquid assets than of liabilities. And we liked the appearance of the 17% year-over-year EBIT growth from last year. We therefore do not believe that V-Guard Industries’ use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 2 warning signs for V-Guard Industries you must be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
If you decide to trade V-Guard Industries, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.