Indo Rama Synthetics (India) (NSE:INDORAMA) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Indo Rama Synthetics (India) Limited (NSE:INDORAMA) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Indo Rama Synthetics (India)

How Much Debt Does Indo Rama Synthetics (India) Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Indo Rama Synthetics (India) had debt of ₹4.23b, up from ₹3.94b in one year. However, because it has a cash reserve of ₹222.9m, its net debt is less, at about ₹4.01b.

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

Zooming in on the latest balance sheet data, we can see that Indo Rama Synthetics (India) had liabilities of ₹9.39b due within 12 months and liabilities of ₹3.21b due beyond that. On the other hand, it had cash of ₹222.9m and ₹872.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹11.5b.

This deficit casts a shadow over the ₹5.84b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Indo Rama Synthetics (India) would likely require a major re-capitalisation if it had to pay its creditors today. 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.

In the last year Indo Rama Synthetics (India) had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₹16b. That makes us nervous, to say the least.

Caveat Emptor

While Indo Rama Synthetics (India)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹1.1b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₹3.3b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Indo Rama Synthetics (India) (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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