Is Ramky Infrastructure (NSE:RAMKY) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Ramky Infrastructure Limited (NSE:RAMKY) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ramky Infrastructure

What Is Ramky Infrastructure's Debt?

The image below, which you can click on for greater detail, shows that Ramky Infrastructure had debt of ₹21.7b at the end of March 2020, a reduction from ₹29.3b over a year. However, it does have ₹6.55b in cash offsetting this, leading to net debt of about ₹15.1b.

A Look At Ramky Infrastructure's Liabilities

According to the last reported balance sheet, Ramky Infrastructure had liabilities of ₹19.5b due within 12 months, and liabilities of ₹20.6b due beyond 12 months. On the other hand, it had cash of ₹6.55b and ₹9.55b worth of receivables due within a year. So its liabilities total ₹24.0b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹2.02b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Ramky Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ramky Infrastructure's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ramky Infrastructure had a loss before interest and tax, and actually shrunk its revenue by 46%, to ₹11b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ramky Infrastructure'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 ₹1.2b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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 ₹3.2b in the last year. So we think buying this stock is risky. 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 Ramky Infrastructure (including 1 which is is concerning) .

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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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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