Is Rajshree Sugars and Chemicals (NSE:RAJSREESUG) Using Too Much Debt?

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. As with many other companies Rajshree Sugars and Chemicals Limited (NSE:RAJSREESUG) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Rajshree Sugars and Chemicals

What Is Rajshree Sugars and Chemicals's Net Debt?

As you can see below, Rajshree Sugars and Chemicals had ₹2.04b of debt at March 2020, down from ₹2.34b a year prior. On the flip side, it has ₹52.6m in cash leading to net debt of about ₹1.99b.

How Strong Is Rajshree Sugars and Chemicals's Balance Sheet?

The latest balance sheet data shows that Rajshree Sugars and Chemicals had liabilities of ₹5.00b due within a year, and liabilities of ₹1.40b falling due after that. Offsetting this, it had ₹52.6m in cash and ₹468.0m in receivables that were due within 12 months. So its liabilities total ₹5.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹388.7m 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, Rajshree Sugars and Chemicals would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rajshree Sugars and Chemicals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Rajshree Sugars and Chemicals made a loss at the EBIT level, and saw its revenue drop to ₹3.2b, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Rajshree Sugars and Chemicals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹132.9m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹469.9m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. To that end, you should learn about the 3 warning signs we've spotted with Rajshree Sugars and Chemicals (including 2 which is make us uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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