Health Check: How Prudently Does Indo Rama Synthetics (India) (NSE:INDORAMA) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. 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. We note that Indo Rama Synthetics (India) Limited (NSE:INDORAMA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Indo Rama Synthetics (India)

What Is Indo Rama Synthetics (India)'s Net Debt?

As you can see below, Indo Rama Synthetics (India) had ₹3.99b of debt at March 2020, down from ₹5.74b a year prior. However, because it has a cash reserve of ₹279.2m, its net debt is less, at about ₹3.71b.

A Look At Indo Rama Synthetics (India)'s Liabilities

According to the last reported balance sheet, Indo Rama Synthetics (India) had liabilities of ₹9.10b due within 12 months, and liabilities of ₹3.51b due beyond 12 months. Offsetting this, it had ₹279.2m in cash and ₹914.6m in receivables that were due within 12 months. So it has liabilities totalling ₹11.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹4.50b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Indo Rama Synthetics (India) would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Indo Rama Synthetics (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.

Over 12 months, Indo Rama Synthetics (India) reported revenue of ₹21b, which is a gain of 25%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly savour Indo Rama Synthetics (India)'s tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Its EBIT loss was a whopping ₹858m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₹1.3b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Indo Rama Synthetics (India) you should be aware of, and 2 of them are a bit unpleasant.

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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