Would Rane Engine Valve (NSE:RANEENGINE) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Rane Engine Valve Limited (NSE:RANEENGINE) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Rane Engine Valve

How Much Debt Does Rane Engine Valve Carry?

The image below, which you can click on for greater detail, shows that Rane Engine Valve had debt of ₹1.03b at the end of March 2021, a reduction from ₹1.21b over a year. On the flip side, it has ₹261.3m in cash leading to net debt of about ₹763.9m.

How Healthy Is Rane Engine Valve's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rane Engine Valve had liabilities of ₹1.29b due within 12 months and liabilities of ₹681.6m due beyond that. On the other hand, it had cash of ₹261.3m and ₹773.5m worth of receivables due within a year. So it has liabilities totalling ₹936.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Rane Engine Valve is worth ₹1.92b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Rane Engine Valve'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 Rane Engine Valve had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₹3.0b. 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). Its EBIT loss was a whopping ₹237m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹61m into a profit. In the meantime, 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 3 warning signs for Rane Engine Valve (1 is a bit unpleasant) 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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