Is Rane (Madras) (NSE:RML) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Rane (Madras) Limited (NSE:RML) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rane (Madras)

What Is Rane (Madras)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Rane (Madras) had ₹4.70b of debt, an increase on ₹4.18b, over one year. However, it also had ₹183.5m in cash, and so its net debt is ₹4.52b.

How Strong Is Rane (Madras)'s Balance Sheet?

The latest balance sheet data shows that Rane (Madras) had liabilities of ₹5.01b due within a year, and liabilities of ₹2.37b falling due after that. Offsetting this, it had ₹183.5m in cash and ₹1.93b in receivables that were due within 12 months. So it has liabilities totalling ₹5.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹2.80b 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 definitely think shareholders need to watch this one closely. At the end of the day, Rane (Madras) 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 Rane (Madras) 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.

In the last year Rane (Madras) had a loss before interest and tax, and actually shrunk its revenue by 31%, to ₹10b. That makes us nervous, to say the least.

Caveat Emptor

While Rane (Madras)'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 ₹671.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹353.1m in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example, we've discovered 4 warning signs for Rane (Madras) (2 are a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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