Does Arvee Laboratories (India) (NSE:ARVEE) Have A Healthy Balance Sheet?
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. We can see that Arvee Laboratories (India) Ltd. (NSE:ARVEE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Arvee Laboratories (India)
What Is Arvee Laboratories (India)'s Debt?
You can click the graphic below for the historical numbers, but it shows that Arvee Laboratories (India) had ₹128.7m of debt in March 2019, down from ₹161.5m, one year before. However, it also had ₹56.0m in cash, and so its net debt is ₹72.8m.
How Strong Is Arvee Laboratories (India)'s Balance Sheet?
We can see from the most recent balance sheet that Arvee Laboratories (India) had liabilities of ₹166.5m falling due within a year, and liabilities of ₹40.3m due beyond that. Offsetting these obligations, it had cash of ₹56.0m as well as receivables valued at ₹80.7m due within 12 months. So its liabilities total ₹70.2m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Arvee Laboratories (India) is worth ₹303.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
While Arvee Laboratories (India)'s low debt to EBITDA ratio of 1.2 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 3.5 last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Importantly, Arvee Laboratories (India)'s EBIT fell a jaw-dropping 24% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Arvee Laboratories (India)'s earnings that will influence how the balance sheet holds up in the future. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Arvee Laboratories (India) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our View
Arvee Laboratories (India)'s EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better In particular, we are dazzled with its conversion of EBIT to free cash flow. When we consider all the factors mentioned above, we do feel a bit cautious about Arvee Laboratories (India)'s use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 Arvee Laboratories (India)'s earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.
