We Think Rane Engine Valve (NSE:RANEENGINE) Has A Fair Chunk Of Debt

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.' 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 Rane Engine Valve Limited (NSE:RANEENGINE) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

How Much Debt Does Rane Engine Valve Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Rane Engine Valve had ₹1.27b of debt, an increase on ₹977.0m, over one year. On the flip side, it has ₹141.1m in cash leading to net debt of about ₹1.13b.

How Healthy Is Rane Engine Valve's Balance Sheet?

The latest balance sheet data shows that Rane Engine Valve had liabilities of ₹1.53b due within a year, and liabilities of ₹592.9m falling due after that. On the other hand, it had cash of ₹141.1m and ₹722.6m worth of receivables due within a year. So its liabilities total ₹1.26b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹1.98b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Rane Engine Valve wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to ₹3.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Rane Engine Valve's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹77m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹198m of cash over the last year. So suffice it to say we consider the stock very 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. For instance, we've identified 4 warning signs for Rane Engine Valve (2 make us uncomfortable) you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.