Does Rane Engine Valve (NSE:RANEENGINE) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Rane Engine Valve Limited (NSE:RANEENGINE) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rane Engine Valve

What Is Rane Engine Valve's Net Debt?

As you can see below, Rane Engine Valve had ₹975.1m of debt at September 2020, down from ₹1.19b a year prior. However, it does have ₹91.1m in cash offsetting this, leading to net debt of about ₹884.0m.

How Healthy Is Rane Engine Valve's Balance Sheet?

We can see from the most recent balance sheet that Rane Engine Valve had liabilities of ₹1.50b falling due within a year, and liabilities of ₹438.1m due beyond that. On the other hand, it had cash of ₹91.1m and ₹627.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.22b.

This deficit is considerable relative to its market capitalization of ₹1.39b, so it does suggest shareholders should keep an eye on Rane Engine Valve's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Rane Engine Valve'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.

In the last year Rane Engine Valve had a loss before interest and tax, and actually shrunk its revenue by 33%, to ₹2.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Rane Engine Valve's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹333m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹282m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Rane Engine Valve (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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