Is Venus Remedies (NSE:VENUSREM) using too much debt?

Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that Venus Remedies Limited (NSE:VENUSREM) has debt on its balance sheet. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Venus Remedies

What is Venus Remedies debt?

As you can see below, Venus Remedies had a debt of ₹429.9 million as of September 2021, up from ₹666.3 million the previous year. However, he has ₹414.5 million in cash to offset this, resulting in a net debt of around ₹15.4 million.

NSEI: VENUSREM Debt to Equity History February 2, 2022

How healthy is Venus Remedies’ track record?

According to the latest published balance sheet, Venus Remedies had liabilities of ₹1.26 billion due within 12 months and liabilities of ₹464.1 million due beyond 12 months. As compensation for these obligations, it had cash of ₹414.5 million as well as receivables valued at ₹889.7 million due within 12 months. It therefore has liabilities totaling ₹417.4 million more than its cash and short-term receivables, combined.

Of course, Venus Remedies has a market cap of ₹4.21 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. But either way, Venus Remedies has virtually no net debt, so it’s fair to say that she doesn’t have a lot of debt!

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Venus Remedies has very modest net debt levels, with a net debt of only 0.023 times EBITDA. Luckily, he actually managed to receive more interest than he paid in the past year. So it’s fair to say that he can manage his debt like an Olympic ice skater manages a pirouette. Even more impressive is that Venus Remedies increased its EBIT by 111% year-over-year. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Venus Remedies will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Venus Remedies has actually produced more free cash flow than EBIT over the past two years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

Fortunately, Venus Remedies’ impressive interest coverage means it has the upper hand on its debt. And the good news does not stop there, since its conversion of EBIT into free cash flow also confirms this impression! We believe that Venus Remedies is no more indebted to its lenders than birds are to bird watchers. For investment nerds like us, his track record is almost charming. 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 outside of the balance sheet. Example: we have identified 4 Warning Signs of Venus Remedies you should be aware.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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