Is Rane Engine Valve (NSE:RANEENGINE) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Rane Engine Valve Limited (NSE:RANEENGINE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rane Engine Valve

What Is Rane Engine Valve's Net Debt?

The image below, which you can click on for greater detail, shows that Rane Engine Valve had debt of ₹1.11b at the end of March 2020, a reduction from ₹1.33b over a year. However, it also had ₹39.9m in cash, and so its net debt is ₹1.07b.

A Look At Rane Engine Valve's Liabilities

Zooming in on the latest balance sheet data, we can see that Rane Engine Valve had liabilities of ₹1.44b due within 12 months and liabilities of ₹479.3m due beyond that. Offsetting this, it had ₹39.9m in cash and ₹626.0m in receivables that were due within 12 months. So it has liabilities totalling ₹1.25b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹1.36b, 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 you can't view debt in total isolation; since Rane Engine Valve will need earnings to service that debt. 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, Rane Engine Valve made a loss at the EBIT level, and saw its revenue drop to ₹3.5b, which is a fall of 16%. We would much prefer see growth.

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). Indeed, it lost a very considerable ₹148m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₹163m into a profit. So in short it's a really risky stock. 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 4 warning signs with Rane Engine Valve (at least 1 which is significant) , and understanding them should be part of your investment process.

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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