Is Rane Holdings (NSE:RANEHOLDIN) Using Debt Sensibly?

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. As with many other companies Rane Holdings Limited (NSE:RANEHOLDIN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Rane Holdings

How Much Debt Does Rane Holdings Carry?

The chart below, which you can click on for greater detail, shows that Rane Holdings had ₹4.91b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₹793.0m, its net debt is less, at about ₹4.11b.

How Healthy Is Rane Holdings's Balance Sheet?

We can see from the most recent balance sheet that Rane Holdings had liabilities of ₹8.32b falling due within a year, and liabilities of ₹3.35b due beyond that. Offsetting these obligations, it had cash of ₹793.0m as well as receivables valued at ₹3.71b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.17b.

Given this deficit is actually higher than the company's market capitalization of ₹6.36b, we think shareholders really should watch Rane Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Rane Holdings 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 Holdings had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₹17b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Rane Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹589m. 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. For example, we would not want to see a repeat of last year's loss of ₹568m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Rane Holdings you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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